IDBI Bank to raise capital worth Rs. 300 crore through perpetual bonds
By Neelima Shankar
Mar 5, 2010
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IDBI Bank has planned to raise Rs. 300 crore this month by way of issuing perpetual bonds. According to Mr. P Sitaram, chief financial officer, IDBI Bank, "The amount raised will be to meet Tier-I capital requirement of the bank."

A perpetual bond is one that does not have a maturity or redemption time. The holder of such a bond is able to earn coupons forever. Since there is no need of redeeming these bonds they can very well be considered as equity rather than debt.

"Other than equity capital and internal accruals, perpetual bonds are the only source of showing tier-I capital in the balance sheet," said Anand Dama, banking analyst at Networth Stock Broking.

It has been revealed that the coupon rate in this case will be priced somewhere between 9.5-9.7 %. It has been observed that high coupon rates are being used by firms as bait to attract customers, if they are following the debt route to raise capital.

"The coupon is priced slightly higher. Last month, State Bank of India's AAA-rated perpetual bond issue was priced at a coupon of 9.05%," said Ajay Manglunia, senior vice-president, Edelweiss Securities.

Cash reserve ratio (CRR) has already been hiked by as much as 75 basis points by RBI as a tool to stiffen the money market. Post credit policy review, IDBI Bank has been the first to hike deposit rates followed by ICICI and HDFC Bank. All these steps have been taken as tools for attracting customers for increasing the capital for the bank.

"In the monetary policy to be held in April, the RBI may raise the reverse repo rate and repo rate by 50 basis points each," said Pradeep Madhav, managing director at STCI Primary Dealership.

RBI expects banks to maintain a minimum Tier I capital of 6%. "Over and above the 6%, the finance ministry considers 8% as the optimal level. Many banks are falling short of this optimal level and IDBI Bank is one of them," said Anand Dama.

He further said that banks like Bank of Maharashtra, Dena Bank, Central Bank of India, Syndicate Bank and UCO Bank are also facing a shortage of Tier I capital.


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