The last few months of the financial year 2004-2005 have witnessed a number of banks raising the Tier II capital. This capital, apart from improving the capital base of the banks, is also being used to cater to the sharp increase in the credit offtake.

Reserve Bank of India, recently issued guidelines on the prudential norms on capital adequacy with a view to adopt Basle Committee on Banking Supervision (BCBS) framework on capital adequacy. The new framework will consider the elements of credit risk on various assets, both in the balance sheet, as well as in the off-balance sheet. Though the new framework is to be implemented by all the banks except the Regional Rural Banks (RRBs), the banks are not complacent. They are shoring up their capital to be in a comfortable position, well in time for the deadline.

Right from the year 2000, banks have been tapping the primary equity market for improving their capital base. In the year 2000, Vijaya Bank and Andhra Bank came out with their public issue. In 2002, the number of banks tapping the primary market increased on the back of good performance and earnings growth.

Equity capital which forms a part of the Tier I capital seems to be quite popular with the Indian banking sector, but what is interesting to note is that the banks are not just limiting themselves to the equity capital. They are also looking out for other channels which will increase their capital base. The months of February and March saw the banks raise the Tier II capital in record levels.

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