The government is likely to infuse Rs 3,000 crore in seven public sector banks to shore up their Capital Adequacy Ratio (CAR) to 12 per cent to improve the market confidence in the banking sector.
Banks likely to benefit from the capitalisation programme include Central Bank of India, Vijaya Bank, Bank of Maharashtra, Uco Bank and Indian Overseas Bank. All the banks have a Capital to Risk-Weighted Assets Ratio (CRAR) below 12 per cent.
While details are still being worked out, about Rs 3,000 crore may be provided to these banks soon, officials said. The capitalisation will be through debt instruments. Banks may issue tier-II bonds or preference shares, which will be subscribed by the government, they added.
Though none of the Indian banks has a CRAR of below 10 per cent against the Indian regulatory requirement of 9 per cent and the global norm of 8 per cent, the government is providing the extra cushion to convey that everything is all right in the banking system.
Unlike in the US and Europe, India is taking preventive steps in the wake of the global financial market turmoil, which saw developed nations infusing capital in banks to stop them from slipping into bankruptcy.
As a part of the measures to ward off negative impact of the global financial turmoil, Finance Minister P Chidambaram had announced that the government had decided to provide banks access to finance to raise the CRAR of banks, which are now between 10 and 12 per cent, to the level of 12 per cent by a suitable date in the future.
"We need around Rs 300 crore to achieve a CRAR of 12 per cent from 10.9 per cent now. Currently, we do not have any headroom to raise capital through tier-II bonds from the market," said Allen C A Peirera, the chairman and managing director of Bank of Maharashtra.
With the domestic financial market not yet comfortable, the cost of raising debt from the government will be cheaper than from the market, which is still nervous due to the global financial turmoil, a senior public sector banker said.
With public sector banks showing good growth even at the time of turmoil, there is an urgent need to capitalise them to face any challenge, going forward, he added.
Punjab & Sind Bank, whose CRAR went up to 12.5 per cent after it raised Rs 400 crore last month, also needs further capitalisation. "Our business has grown by 74 per cent as on June 30 this year over the corresponding period last year. We need more capital to sustain the growth to expand our balance sheet," the bank Chairman R P Singh said.
Rating agency Crisil on Wednesday said state-run banks with the government holdings very close to the minimum level of 51 per cent will benefit the most as they have limited or no flexibility to raise equity capital unless the government subscribes to their rights issues.