Dash For Cash.

(From Business Today (India))

Byline: Anand Adhikari

The auditorium of the National Centre for Performing Arts (NCPA) in south Mumbai is often host to theatrical productions that range from the traditional to the experimental. In August, the hall was the venue for what you would normally assume to be an event completely bereft of comedy, tragedy, history or experiment-the annual general meeting (AGM) of the Indian Banks' Association (IBA). Also present at the AGM, along with the assorted head honchos of India's premier banks, was Finance Minister P. Chidambaram. Not totally unpredictably, the theatrical environs of the AGM setting prevailed over the lack of a dramatic air at the AGM, prompting the FM to hark back to a bit of Shakespearean melodrama. Picking out a couplet from Henry VI, Part II, Chidambaram thundered: "Ignorance is the curse of God; Knowledge is the wing wherewith we fly to heaven." Even as the front rows packed with by-now baffled

bank ceos pondered the provocation for this rather cryptic tempest, the minister duly set out to rephrase the good bard of Avon: "Inaction is the curse of God; action is the wing wherewith we fly to heaven."

It may have been a rather drastic method of conveying a pithy message to the banking community, but it seems to have worked well enough. For, the industry is indeed in action mode, at least on the capital-raising front. Consider: ICICI Bank is expected to hit the US and domestic markets in December with a mega-issue of Rs 7,000 crore-the largest ever equity offering, second only to ONGC's 10,000 crore offer last year. Other banks too have hopped on the capital-raising wagon: Kotak Bank plans to raise a little over Rs 300 crore, Union Bank of India will mobilise Rs 600 crore, and Bank of Baroda has plans to mop up Rs 1,600 crore. The list is long (see It's Raining Equity Offerings), with most of these banks taking the plunge in a bid to raise their tier-I equity capital (banks' capital comprises two tiers, tier I and tier II. Tier I is the core capital consisting of equity capital, reserves and surpluses, while tier II refers to debt capital).

Even without Chidambaram's exhortations, bank CEOs would have had their compulsions for rushing to the markets, the biggest one being the lag between bank deposits and banks' non-food credit: Whilst the former grew by 15 per cent in 2005, non-food credit was up by twice that figure. How do bankers explain this phenomenon? "We have seen people reallocating their savings between financial and physical assets like housing, vehicles etc.," reasons Chanda Kochhar, Executive Director at ICICI Bank. G.V. Nageswara Rao, CEO (Commercial Banking), IDBI Ltd, explains that a part of household savings is gradually moving into capital markets, mutual funds and high-yielding post office deposits.

To top it, many banks' existing capital has been severely hit in the past by the reversal in the interest rate cycle. This resulted in massive losses in the treasury books of some of the banks, leading to erosion of capital. Rajesh Mokashi, Executive Director at ratings agency Care Ltd, believes that any upward movement in interest rates on the back of inflationary pressure will continue to impact the tier-I capital of banks since many banks are still holding G-Secs under the sale category. Points out K. Cherian Varghese, CMD, Union Bank of India: "Banks are resorting to disposing of the surplus G-sec stock in exchange for cash to meet the growing credit demand." RBI statistics bear this out. In a recent report, the apex bank observes: "The banks' G-Sec holdings have fallen below 36 per cent in September 2005 from a high of 40 per cent a year ago, but still is above the 25 per cent statutory requirement."