“I had my eye on capital and after RBI came out with the AQR, I was not certain as to where we would stand with regard to capital,” Rego said. According to him, the bank sold Inter Bank Participation Certificates (IBPCs) of close to Rs 8,000 crore which also led to the the shrinkage of the balance sheet. Its balance sheet shrank 1.4% to Rs 6.09 lakh crore in FY16.
Rego added that, for BoI with presence in 22 countries, it would have been a very serious matter. “Overnight, the inter bank lines would stop, the letters of credit (LCs) and the bank guarantees (BGs) will no longer be accepted, the refinancing of our bonds under the MTN programme would not be possible,” he explained. As per RBI guidelines, a bank must maintain a total capital adequacy ratio of at least 9% of its risk-weighted assets (RWAs), including a 7% Tier I capital ratio.
IBPC transactions are aimed to fill short-term requirements of banks and are typically bought back by the seller bank within three to four months, depending on the agreement. Rego noted that faced with the dilemma between the shrinking of balance sheet and capital requirement, the entire top management decided to ‘play safe’. “These IBPCs are for three months, so it comes back to us after that,” he added.
The bank’s CAR under Basel III stood at 12.01% as on March 2016 with a tier I capital ratio of 9.03% and Tier II capital of 2.98%.
“Finally when we got all the numbers, we found that we are fairly comfortable,” Rego said, adding that the bank was not sure of how much it could garner from revaluation reserves done and did not know what the deferred tax would be.
The bank’s advances shrank to Rs 3.82 lakh crore in FY16 from Rs 4.11 lakh crore in FY15 and was mainly because of the reduction in the corporate book. Rego said that on the international side, he felt there was no point in doing business like buyer’s credit which was not profitable to the bank. “We we getting a spread of 20-30 basis points (bps) and it did not make sense at all to do the business,” he said, adding that the bank did not stop buyer’s credit altogether. A buyer’s credit is a loan facility extended to an importer by a bank or financial institution to finance the purchase of capital goods or services and other big-ticket items.