RBI may redefine norms on hybrid instruments

New Delhi, March 29 | Updated: Mar 30 2006, 05:30am hrs
The Reserve Bank of India (RBI) is likely to revise its guidelines on hybrid instruments, with a view to enabling scheduled commercial banks (SCBs) to raise additional capital. A fresh guideline on the issue is expected to come out within a couple of weeks, official sources said.

It is learnt that senior bankers in their recent meetings with the central bank have made it clear that the hybrid instruments, which have been recently allowed by RBI, would fail to serve the purpose.

Sources said there is pressure on the central bank to make an announcement allowing more instruments, including the ones to raise tier III capital.

We are hoping that RBI would revise its guidelines on the same and allow the banks to raise capital through other hybrid instruments. However, it would be clear whether or not RBI accepts the proposals of the bankers, a source told FE. The finance ministry has also taken up the issue with the RBI, sources added.

Rating agencies like Icra have pulled down ratings for the hybrid instruments. Icra said the instruments like innovative perpetual debt instrument and senior subordinated debt carry a higher level of uncertainty and higher probability of default than conventional instruments.

It may be noted that until now there have been no major takers for these instruments. In spite of the announcements, most banks like United Bank and Punjab and Sind Bank have opted to hit the capital market. Bankers also said that a revision on the same would come as a breather to them. RBI, however, would come up with a different guideline on preference shares within a few weeks.

In the wake of the implementation of the stringent Basel II norms in 2007 and to keep pace with the credit growth, banks would require to raise additional capital.