KARACHI, Jan 1: All banks have been asked to have a minimum capital base of Rs1 billion before end December 2002 failing which, the State Bank Governor Dr Ishrat Hussain warned on Tuesday, “all such banks would be de-scheduled.”

“Consolidation and mergers is the answer which I have been pleading,” Dr Ishrat declared at a press conference at the SBP while pointing out that a criterion of Rs750 million minimum capital base for banks has already expired end-December 2001.

While no punitive action was stipulated for non-compliance with Rs750 million capital base, he was firm to declare that all such banks which would not be able to line up Rs1 billion capital will “certainly be de-scheduled.”

The banks have, however, been allowed to include subordinated debt instruments like Term Finance Certificates and bonds to treat as supplementary capital.

“Subordinated debt will be limited to a maximum of 50 per cent of the amount of equity and will also include rated and listed subordinated debt instruments raised in the capital market,” an SBP circular issued on Tuesday declared.

The SBP circular, however, stipulates the instruments to be eligible for inclusion in the supplementary capital should be “fully paid up, unsecured, subordinated as to payment of principal and profit to all other indebtedness of the bank, including deposits and should not be redeemable before maturity without prior approval of the SBP.” Banks have been advised to obtain prior approval from the SBP.

A whole set of rules have also been issued by the SBP with the circular which states that the subordinated debt instruments should have a minimum original fixed term to maturity of over 5 years. It spells out a schedule for purpose of counting the subordinated debts towards supplementary capital. It stipulates a discount factor of 20 per cent per year.

There is also a provision that the instrument should be rated separately with minimum rating of A or equivalent is required.