Union finance minister P Chidambaram in his Budget said that banks were to be allowed to issue preference shares, since preference share capital can be treated as regulatory capital under specified circumstances as per the Basel norms.
Though a month has passed after the Budget was presented, no clarity on the issue of whether the funds raised through a preference issue will be classified as Tier-I or Tier-II capital has been made by the ministry of finance (MoF).
As per the current norms, if the funds are raised for a period of 12 years, it can be classified as Tier-I. For a period less than 12 years, this comes under Tier-II.
Pointing out the advantages of making the preference share as part of the Tier-I instead of Tier-II, bankers point that such arrangement will facilitate dividend payment without diluting the equity.
It would be nice if they allowed it as Tier-I, says a senior banker of Bank of India. Allowing banks to issue preferential shares is also a good move and offers banks one more avenue to raise capital. As the credit growth has witnessed an upswing in recent times, all banks will go in for a large capital mop up.
The permission for issue of preference shares would help banks manage their Tier-I capital. This will especially benefit banks which have reached the government holding of 51%. said another senior public sector banker.