Public sector banks revaluing reserves to shore up capital base

Public sector banks revaluing reserves to shore up capital base

Mumbai: Some of India’s public sector banks have started revaluing their assets in an effort to strengthen their capital base in an attempt to meet a new international norm.

Bank of India (BoI) has already done this and added about Rs700 crore to its revaluation reserve, or the head under which any increase in asset value has to be accounted. Bangalore-based Vijaya Bank has also revalued its assets, but it is not known to what extent its revaluation reserve has gone up. And Union Bank of India and Bank of Baroda plan to revalue their assets before the end of fiscal 2008.

The revaluation reserve is part of a bank’s tier II capital. A bank’s capital has two components—tier I and tier II. While tier I, or the core capital, comprises its equity and reserves, tier II comprises undisclosed reserves, general provisions and loss reserves, long-term debt, hybrid debt capital instruments and revaluation reserves.

A new international accounting norm (also called the Basel II norm) requires banks to maintain a capital adequacy ratio of 12%, while the Reserve Bank of India’s (RBI’s) current norm requires banks to maintain a capital adequacy of 9%.

A revaluation reserve can serve as a cushion against unexpected losses, but is less permanent in nature and cannot be considered core capital. It arises from revaluation of assets that are undervalued in the bank’s books and include bank premises and marketable securities.

However, as the valuation depends on fluctuating external conditions—this makes it a bit unreliable to depend upon—under RBI rules only 45% of the revaluation reserve can be taken for inclusion in tier II capital.

“We revalued our assets this half-year because they were highly undervalued. It’s a cheaper mode to revalue assets to add to capital, and we have the legitimate right to do so," said R.K. Bakshi, general manager, BoI.

“Besides, it was done to reflect the fair value of our assets in our balance sheet. We added about Rs700 crore to our tier II capital," he added. BoI revalued some of its assets, not all of them.

Union Bank of India also plans to revalue its assets before the end of this fiscal. People familiar with the development at the bank say this will tentatively add Rs400-500 crore to its tier II capital.

“It’s cheaper to revalue your assets rather than to issue long-term bonds (another way of raising capital) and pay 9% interest.?We?are?revaluing our assets after a long, long, time—possibly (for the) first time since 1994. All the assets were at their historical value and we feel it is time to bring them on their market value," said an official at Union Bank who did not wish to be identified.

The bank recently announced plans to issue perpetual bonds worth Rs300 crore to shore up its capital adequacy ratio. People familiar with the development at Bank of Baroda said it plans to revalue its assets by the end of fiscal 2008. “The bank has all of the options available to raise capital. Revaluing assets is one of the options as the bank has not revalued its assets in recent history," said one of these people.

According to Hatim Broachwala, an analyst with domestic brokerage Khandwala Securities, “It’s a nice idea to revalue the assets as the capital increases without incurring any cost."

However, not all public sector banks are planning to revalue their assets.

According to former chief general manager of State Bank of India K.M. Bhattacharya, revaluing assets should be the last resort to prop up capital. He said this does not translate into a real increase in a bank’s capital.