RS 6,000-CR CAPITAL BOOST FOR 10 BANKS

To maintain the pace of economic growth through easy availability of credit, the Government approved capital infusion of Rs 6,000 crore into 10 public sector banks (PSBs).

This is over and above the Rs 15,000 crore already provided to the banks in the 2010-11 Budget.

According to the decision taken by the Cabinet Committee on Economic Affairs (CCEA), the fresh funds would help all state-held lenders meet Tier 1 CRAR (Capital to Risk Weighted Assets) at 7 per cent.

The move would also effectively increase the Central Government's shareholding in all PSBs to at least 58 per cent.

Lending capacity

“The proposed capital infusion would enhance the lending capacity of the PSBs to meet the credit requirement of the economy in order to maintain and accelerate the economic growth momentum.

The additional availability of capital is likely to benefit employment-oriented sectors, especially agriculture, micro and small enterprises, exports and entrepreneurs … in promotion of their economic activities,” the CCEA statement said.

However, it added that the exact amount of capital required by the banks, besides the mode of capitalisation and other conditions, would be decided in consultations with the PSBs at the time of infusion.

During the global financial crisis, the PSBs played a pivotal role by extending credit to all the productive sectors, the statement added.

In 2008-09, advances of the PSBs increased by over 25 per cent against the 10 per cent higher credit disbursement of private banks and the 4 per cent growth in lending by foreign banks.

Minimum CRAR

Currently, the RBI mandates a minimum CRAR of 9 per cent. But the Government has mandated a total CRAR of 12 per cent, with 8 per cent for Tier 1 capital.

According to a Government analysis, currently there are 10 PSBs with a government shareholding of below 58 per cent. These include Punjab National Bank, Vijaya Bank, Allahabad Bank, Dena Bank, Andhra Bank, Corporation Bank, Bank of Baroda, Oriental Bank and Union Bank. The Government increasing the stake would help these banks access the capital market for funds later through divestment of government-holding. An above 51 per cent equity and CRAR of 8 per cent would help the PSBs in coming out with IPOs while the Government still maintains ownership.

SOURCE: http://www.thehindubusinessline.com/2010/12/02/stories/2010120253940100.htm