Friday 9 May 2008

Cashing the real estate!

Chennai-based Indian Overseas Bank is planning to sell its properties to self-promoted special purpose vehicle, thus realising the entire profit and then ploughing it back to its Tier-I capital. IOB will do a leaseback deal of properties that it had sold to the SPV.
According to the bank's estimates, the prices of its property has appreciated nearly 200 per cent over the last couple of years.

IOB has sought the approval of the finance ministry for implementing the idea, according to a top bank executive. If approved by the ministry, the government-owned bank's profit will soar by Rs 6 billion and the amount will be ploughed back to its Tier-I capital.

Banks are allowed to use 40 per cent of the rise in assets valuation to accrue to their Tier-II capital. In the current case, however, the bank will show the transaction as a sale and not revaluation. Hence the entire value of the property is accruable to its Tier-I capital.

The move followed a substantial depletion in the bank's capital adequacy ratio in the previous financial year as it had to comply with Basel-II norms. The capital adequacy ratio of the bank was 11.13 per cent as on March 31 compared with 13.27 per cent in the same period a year ago. The Tier-I capital stood at 7.31 per cent. The decrease in CAR of IOB has happened as Basel-II norms includes attaching higher weights to various risky assets.

So net net the bank would make profits virtually and make its balance sheet look healthier just by doing some paper work. Kudos, Ye hai India meri jaan.

Sources: Business Standard

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