Further, in the last credit policy the RBI signalled that it was getting tougher and wanted more conservative prudential standards to be followed within a short time frame. The various norms suggested will see the Indian public sector banks start providing capital against weighted risk assets for almost every category of assets held by it.

Bank of India has been one of the hardest hit amongst the public sector banks. It is reputed to have one of the largest number of NPAs; with the net NPA ratio presently at 7.3 per cent. Though at present its capitaladequacy ratio is comfortable at 9.4 per cent. Adhering to the new norms will easily bring the ratio below RBI's required norm of 9 per cent for 1998-99. Most PSU banks will have to raise capital in order to meet the revised prudential norms for making risk weighted provisions against its assets. There were reports that BoI's attempts at raising tier II capital had failed a few months ago.

As it is for 1997-98, a year in which most banks improved their return on assets, BoI's dipped to 0.79 per cent from 0.95 per cent, following a hefty increase in provisions. The additional provisioning has already hurt BoI's earnings in the current year. Net profit is down by more than half in the first six months at Rs 101 crore.

The bank's management has decided to take on a restructuring course in keeping with the CBSR recommendations. First, accepting that its loan assets are its biggest source of problems the bank has decided to get tough here. It has decided to liquidate bad assets, increase provisionings andavoid lending to potentially loss-making sectors. Two, the management has decided to aggressively pursue recoveries wherever possible and the bank has started doing some innovative deals with borrowers in some problem sectors. It has decided to take the assets of builders financed by it on its books;

therefore in case of a default from the builder the assets are immediately possessed without resorting to a lengthy procedure. The top management has indicated that future credit expansion would be through loan recoveries. Three, it has decided that if capital raising is a problem it will reduce its exposures to those assets that require higher provisioning, and instead acquire other assets such as those that qualify as SLR securities.

The idea behind these remedial steps is that the bank should be ready for the tightening of prudential norms within a specified time frame. However, the bank's ability to raise further capital will be crucial for reviving of of investor confidence.

Bank of Rajasthan:Beneficial rights

As part of its restructuring efforts, Bank of Rajasthan (BoR) has gone in for a rights issue at Rs 15 per share. The proceeds of this issue will be used to shore up its capital adequacy ratio. But the market has reacted negatively to the prospects of BoR diluting its equity further.

The immediate prospects are not very bright for shareholders as the bank is still in the middle of its restructuring, and losses are expected to be the highest ever at Rs 80 crore in the current financial year. The present net interest spread of BoR is just 0.85 per cent. It does not score very well on other parameters as well. The idea behind the restructuring involves a complete overhaul of its assets, a large number of which are bad. The bank will provide for all bad assets and start activities afresh, hence the large expected losses. But, once these losses are taken and capital is shored up returns will accrue to the shareholders. Prior to the decision to offer rights shares the stock had raced to Rs80 on the news of its restructuring. Since then the stock has lost more than 50 per cent of its value to its present price of Rs 35.