MUMBAI, Oct 6: The finance ministry will bail out the Bangalore-based Canara Bank by pumping in recapitalisation funds if the bank falls short on the capital adequacy front following its offer to buy out Canstar units at Rs 23-twice the underlying net asset value. The bank will take a hit of Rs 600-Rs1,000 crore depending on how many unitholders take up the offer.

"The government is the owner of Canara Bank. We will not allow it go down the hill. If the need arises, there will be capital infusion... we are waiting to get a clear picture," said CM Vasudev, additional secretary (banking), ministry of finance, on Monday.

Vasudev also reiterated the ministry's commitment to bail out the Madras-based Indian Bank by infusing capital provided all trade unions signed a memorandum of understanding (MoU) with the bank management. "We will give the funds. But there is no soft option.... All unions will have to give a commitment," he said.

Vasudev's statement puts to rest all speculation about the fate of the Bangalore-based profit-making public sector bank's near-term viability. At one point of time, the finance ministry had refused to provide any financial succour to Canara Bank as the decision to bite the bullet in the Canstar redemption case was unilaterally taken by the Canara Bank board. "We will back the bank... This is one of the best banks in the country... we will not allow it to slip," Vasudev told journalists at the Bank Economists' Conference here. The one-time offer to buy back Canstar units expires next week (October 11). If all unitholders decide to opt for redemption, Canara Bank will land itself with a liability of Rs 1,000 crore more against its own net worth of over Rs 2,000 crore.

"We will have no problem on the capital adequacy ratio front which is currently pegged at 10.6 per cent. Since the expansion of risk-weighted assets is minimal this fiscal, there is unlikely to be any pressure on the bank's capital adequacy. If it is required, we may raise 10-year subordinated debt by the year-end to boost the tier-II capital," said Canara Bank chairman TR Sridharan. He, however, ruled out any plan to tap the capital market in the near future.

"We are not thinking in terms of floating a public issue," said Sridharan. The bank will register a net profit of about Rs 240 crore in the current fiscal, up from Rs 147 crore in the previous year, he said.Canara Bank has, so far, received applications for the redemption of 25- crore Canstar units out of a total of 45.6 crore units. Going by the response so far, the bank's total liability will be around Rs 500-600 crore towards meeting the redemption cost, Sridharan said.

``We will be able absorb the entire amount from our own resources,'' he said.Even after using 20 per cent of the reserves, the bank's capital adequacy ratio will remain marginally above the stipulated 8 per cent, he said.

Justifying the bank's decision to stick to its old commitment of meeting the redemption value in the Canstar scheme, he said the bank preferred to protect the commercial interests of its unitholders instead of taking a legal view.

Indian Bank chairman S Rajagopal said efforts were on to convince the trade unions to enter into a memorandum of understanding (MoU) with the management. "I am hopeful it will be sorted out soon, and we will get the funds," Ragagopal told The Financial Express. The CP(M)-affiliated Bank Employees Federation of India (Befi) has refused to sign the MoU even though other unions have already given their commitments.

"We will need Rs 1,750 crore from the government," Rajagopal said. ICRA, which has chalked out the turnaround strategy for the bank, felt that any delay in capital infusion will jeopardise the revival of the bank. It has called for an immediate capital infusion of Rs 2,150 crore. "If any of the stakeholders delay in playing their roles, the cost of reviving the bank only increases. If the delay goes beyond the next six months, the cost of revival will rise sharply," ICRA said in its report on Indian Bank.

Said Vasudev: "We will not infuse funds unless we receive the commitment from all unions. There is no soft option. In the past funds were infused in other banks without seeking this kind of commitment...one learns from experience...".

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.