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18 govt banks to be recapitalised

Sidhartha  |  Mumbai 

Almost all public sector banks, barring a handful such as Punjab National Bank, Bank of India and Canara Bank, are in line to get recapitalisation from the government over the next 24 months.

Sources close to the development said 18 banks will be taken up for assistance and the government will provide budgetary allocation for recapitalisation in case its proposal to raise around $3 billion from the World Bank does not materialise.

The fresh capital infusion, which will be through a mix of instruments ranging from preference shares, subscription to rights issues and other avenues, which are being explored, will also result in an increase in the government holding in these banks to enable them to go for public offers at a later date.

Although the capital adequacy ratio — the ratio of capital fund to risk weighted assets — of all public sector banks and the six State Bank of India associates is above the prescribed level of 9 per cent, the government has decided to go for fund infusion and restructuring because they need capital to expand their business.

In recent months, a large part of the business has moved away from private and foreign banks raising the need for fund infusion. With the government holding close to the 51 per cent floor mandated by law, many of the banks are finding it difficult to expand their equity base.

The public sector players have already submitted their capital requirement for the next two years and how they intend to meet the needs. United Bank of India, Dena Bank, Bank of Maharashtra and IDBI Bank are expected to be among the next set of banks whose capital infusion proposals will be taken up and an allocation is likely to be made when the budget for 2009-10 is presented this summer.

So far, the government has either provided funds or restructured the capital of State Bank of India, Punjab & Sind Bank, Vijaya Bank, Central Bank of India and Uco Bank. In all, nearly Rs 15,000 crore has been paid to these banks since March 2007 to help them bolster their capital base to meet their growth requirements.

In this year’s budget, the government has made an allocation of Rs 1,900 crore that was part of the proposal to provide over Rs 3,800 crore to Vijaya, Uco and Central Bank.

Between 1985-86 and 2000-01, the government provided Rs 20,446 crore recapitalisation assistance to public sector banks. Since then, the Centre’s intervention has been limited, with fund infusion coming only in extreme circumstances like for Indian Bank to put the bank back on track and to IDBI to help it clean up its balance sheet by transferring bad debt to a trust.

Bank-wise details are being worked out by the department of financial services in the ministry, but sources said the government may not provide capital to the six SBI associates since it does not have any direct holding. “SBI associates are being discussed and a final call needs to be taken,” said a source.

The sequence of fund infusion will be based on parameters such as the ability to raise tier-II and tier-II capital, the government holding and the capital adequacy ratio. “Banks which have no headroom to dilute further capital or are unable to raise tier-I or tier-II capital will get the assistance first. In addition, the government will look at the level of capital adequacy ratio before deciding the sequence,” said a source.

First Published: Wed, February 18 2009. 00:31 IST