New RBI accounting rules brought down the capital of ICICI Bank
New accounting rules have brought down the capital of the country’s second-largest lender, ICICI Bank. The bank’s tier-I capital, which comprises equity and free reserves, is down by Rs 1,130 crore for the year ended March 31, 2010, due to changes announced by the Reserve Bank of India (RBI) on treatment of securitisation exposures and special reserves.
Banks securitise loans by transferring assets from their books to special purpose vehicles and slicing them into bond-like papers, called pass through certificates (PTCs), that are sold to other institutions. This gives banks the headroom for more lending. ICICI has been the most aggressive bank in the securitisation market.
Banks create special reserves by dipping into pre-tax profits. When they securitise loans in the form of PTCs, they also hold a certain portion of these PTCs.
Under the key changes, RBI has now said such investment in PTCs, where banks provide guarantees, have to be reduced from the capital. On the treatment of special reserves, the regulator has announced that only the portion of reserves that is net of tax payable should be added to the capital.
“The deduction from capital and reserves on account of securitisation increased by about Rs 2,100 crore during the year. This change had an impact of Rs 2,100 crore in tier-I capital on March 31, 2010,” said an ICICI official. According to him, a bulk of the securitised papers will mature in two years.
Some of the state-owned banks have also suffered a deduction in tier-I capital. But for most PSU banks, the deduction was on account of treatment of illiquid assets—securities that are not actively traded in the market.
Union Bank of India and Bank of Baroda saw a reduction in tier-I capital of around Rs 60 crore while Bank of India saw its tier-I capital dip Rs 200 crore.
A bank’s lending capacity is determined by the capital it has. Banks are required to maintain a capital adequacy ratio (CAR) of 9%, which includes tier-I capital and tier-II capital (or subordinated debt). As far as illiquid papers go, ICICI Bank’s capital has not been impacted. The capital reduction, however, will not bring down ICICI Bank’s lending capacity; the bank’s tier-I capital adequacy is at 14% as against a regulatory minimum of 6%.
Excluding the ploughback of Rs 2,500 crore by ICICI Bank—the difference between Rs 4,000 crore of net profit and Rs 1,500 crore of dividend payout—the bank’s tier-I capital will lower by almost Rs 3,600 crore.
The impact due to changes in the special reserves accounting has been Rs 900 crore. Under Section 36(1) (viii) of the Income Tax Act, banks are allowed to park a portion of their pre-tax profit in special reserves. In November 2009, RBI clarified that the net amount of such reserves (net of tax payable) should be taken into account for the purpose of tier-I capital. Thus for computing tier-I capital, the bank had to deduct the notional tax payable on special reserves.
Other factors that brought down the bank’s tier-I capital include a Rs 300-crore deduction due to deferred tax assets, Rs 100-crore investment in capital instruments of subsidiaries and another Rs 115 crore appropriated to investment reserves that are not included in tier I but considered as part of tier-II capital.
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