The new United Progressive Alliance (UPA) government will infuse about Rs 16,000 crore fresh

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capital into 16 public sector banks in its first budget expected to be presented in July 2009.

A senior official in the finance ministry told Financial Chronicle that the infusion of the capital by the government would provide the banks additional headroom to raise another Rs 12,000 crore Tier-II debt from the capital market.

Recapitalisation of government-owned banks would be one of the major issues to be taken up by the new government. The ministry of finance is preparing a detailed note on the issue for finance minister, Pranab Mukherjee.

The official said that the ministry was in talks with the World Bank for the release of the $3 billion (Rs 14,100 crore at current exchange rates) that had been committed by the multilateral institution to recapitalise Indian banks.

“We are considering recapitalisation of nearly 15-16 government-owned banks during the current financial year. We are in talks with the World Bank for release of the $3 billion committed by them,” the official said.

The official said that out of the 19 nationalised banks in the country, only two--Punjab National Bank and Bank of Baroda--have capital adequacy ratio of over 14 per cent and might not require capital support during the current financial year. “Barring these two all other banks might have to be capitalised during the year,” he said.

The strengthening of the capital base of PSU banks will be done for the dual purpose of insulating the government-owned entities from any possible adverse impact of the global financial crisis and to enable them to expand their credit portfolios to support industrial growth.

In one of his first pronouncements after being sworn in to the cabinet, Pranab Mukherjee said that the government’s priorities would be to put the economy back on the rail and to insulate it from the ongoing financial crisis.

As per Basel-II prudential norms, banks are required to maintain a minimum 9 per cent capital adequacy (capital backing based on different risk attached to each form of lending). However, the former finance minister in the previous UPA government, P Chidambaram, had said that Indian public sector banks would be required to maintain a higher capital adequacy of over 12 per cent to enable them to withstand any shock to the financial system arising out of the global financial crisis.

Naresh Takkar, managing director of ICRA, felt there could be need to augment the banks capital base due to economic uncertainties. “Indian banks are adequately capitalised as far as regulatory capital is concerned. However, because of the uncertainty in the operating environment it would be prudent if there is a higher cushion,” Takkar said.

Takkar also pointed out that in the present environment where companies are facing lack of funding avenues, banks would be the main source of funding. “A higher capital adequacy would allow the banks to lend more freely to companies,” he said.

As per an assessment made by the finance ministry, the risk weighted assets of all the public sector banks (including State Bank of India and its associate banks) would rise from Rs 20,07,162 crore on March 31, 2008, to Rs 25,08,956 crore on March 31, 2009, Rs 31,36,199 crore on March 31, 2010 and Rs 39,20,248 crore on March 31, 2011. The figures were worked on the assumption of an asset growth of 25 per cent per annum. The higher risk weighted assets would mean that the banks would be required to maintain a higher capital to back the growth in their asset portfolio.

The 16-odd banks to be recapitalised during the current financial year would include four banks for which the second tranche of capital support is pending. The Union Cabinet in February 2009, had approved infusion of Rs 3,800 crore capital into Central Bank of India (Rs 1,400 crore), UCO Bank (Rs 1,200 crore) and Vijaya Bank (Rs 1,200 crore). The first tranche in 2008-09 was of Rs 1,650 crore. The remaining amount of Rs 2,150 will be infused in 2009-10.

As part of the first tranche, UCO Bank got Rs 450 crore, while Central Bank of India and Vijaya Bank got Rs 700 crore and Rs 500 crore, respectively. In the second tranche, UCO Bank will get Rs 750 crore, while Central Bank of India and Vijaya Bank will receive Rs 700 crore each. The government will provide the capital through tier-I innovative capital instruments.