IndusInd Bank needs to raise (tier-I) capital and its Managing Director & CEO, Mr Bhaskar Ghose, says the board would prefer to do so by issuing shares to a "strategic partner".

"Our intention is to get a foreign bank as a strategic partner," Mr Ghose said, adding that the bank's "Plan B" for raising equity would be a follow-on GDR issue. He practically ruled out a regular follow-on public or rights issue.

The bank's capital adequacy ratio, as at end-September, was 11.77 per cent. While the bank has headroom to raise about Rs 300 crore by way of tier-II capital (long term debt), Mr Ghose feels tier-II capital would be expensive. In an informal chat with journalists here today, he said that such fund-raising would be completed this financial year.

Regulations do not permit a bank to pick up over 5 per cent stake in another bank, but Mr Ghose says that many foreign banks are willing to invest up to 5 per cent.

"A lot of foreign banks are interested in establishing a base in India before the markets are opened up (for equity participation by one bank in another)," he said.

Mr Ghose was here in connection with an announcement of a tie-up with the Chennai-based Cholamandalam MS General Insurance Company to sell the insurer's products.

He said that IndusInd Bank would prefer a strategic investor to a private equity fund because typically a strategic investor would pay a premium to the market, while the fund would probably want a discount. The bank would also benefit by the expertise and brand of the investing foreign bank.

PERFORMANCE

In 2006-07, IndusInd Bank made a profit of Rs 68 crore, but ended up with a Rs 30-crore profit in the first half of the current year, compared with Rs 57 crore in the same period last year-thanks to a 80 per cent drop in profits in the first quarter.

But Mr Ghose says he is confident that current year's profits would be higher than last year's.
The bank ran into trouble because of changes in regulations relating to securitisation of assets. (IndusInd Bank, due to the takeover of the vehicle financier, Ashok Leyland Finance, was a major seller of loan assets).

The regulations caused changes in recognition of interest income on assets sold off. They also deducted the capital shore-up funds (funds set aside to pay the buyer of loan assets in case the loans turned bad) from the bank's capital for the purpose of calculating capital adequacy.
When hit by the changes in the regulations, Induslnd Bank had about Rs 550 crore of shore-up capital.

Because its capital shrank, it could not lend more. Besides, since the securitisation route for raising resources was lost, it had to depend upon the costlier bulk fixed deposits to raise funds for lending.

The bank's average cost of deposits is today 7.7 per cent.

TURNAROUND

But now, according to Mr Ghose, these problems are going away. Shore-up capital is coming back as the loans are getting paid off.

Low cost (current account, savings account) deposits are going up and today account for 17 per cent of the bank's Rs 15,400 crore deposits.

Mr Ghose expects CASA to improve to 35 per cent in 2009-10, because, under the new guidelines of the RBI, IndusInd Bank's associate company, IndusInd Marketing and Financial Services, which has 600 branches across the country, is now allowed to function as agents of the bank.

These branches would be operationalised this year and their services would be fully available to the bank from next year-to collect deposits on behalf of the bank, originate loans and sell third party financial products.