State Bank of India will receive Rs 7,900 crore from the government through a

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preferential allotment. The money will help fuel the bank’s growth and improve its core capital base. It will also free up additional capital for the bank to lend to productive sectors of the economy and expand its balance sheet.

The fund infusion will help the government holding in the bank to move up to 62 per cent from the current 59.4 per cent.

Pratip Chaudhuri, chairman and managing director of SBI, told Financial Chronicle that the fund infusion would help the bank improve the capital adequacy ratio to 9 per cent. “The shareholding of the government will go up to 62 per cent. The money will also fund the growth of the bank. This was the request we had put in to the government and we have received it," said Chaudhuri.

Separately, Punjab National Bank, the second largest public sector bank by assets, has also got fund infusion of Rs 1,254 crore also through a preferential allotment.

SBI accounts for one-fourth of the total bank credit in India.

The ratings downgrade of SBI by Moody’s in October 2011 has been a sore point for the government. Ratings agency Moody's downgraded the standalone rating for SBI on October 3, 2011, to D+ from C- due to the bank’s capital situation and deteriorating asset quality. “Our expectations that non-performing assets (NPA) are likely to continue rising in the near term — due to higher interest rates and a slower economy — have caused us to adopt a negative view on SBI's creditworthiness,” Moody’s had said in a release then.

Nitin Kumar, analyst with Quant Capital, said the fund infusion would improve the capital adequacy ratio. “It will also free up funds to improve their lending operations to productive sectors and further expand their balance sheet,” said Kumar.

In a filing to the Bombay Stock Exchange on Monday, SBI said the government, vide its letter dated January 30, 2012, has conveyed its approval under section 5(2) of the State Bank of India Act to increase the issued capital by SBI by way of preferential allotment of equity shares to the government to the extent of approximately Rs 7,900 crore (including premium).

At the end of the fourth quarter ended March 31, 2011, about Rs 7,927 crore arrears of pension liability for the earlier year was on account of wage revision taken through the capital account, which is the core capital reserves of the bank. This resulted in tier I capital fall to 7.77 per cent in March, and further to 7.47 per cent by end of second quarter 2011-12.

The asset quality of the bank is a major challenge with the bank reporting gross non-performing assets (NPA) of Rs 33,946 crore, which is 4.19 per cent of total advances and net NPA was Rs 16,120 crore, which was about 2.04 per cent of total advances at the end of the second quarter ended September 30, 2011. The total restructured book (outstanding of the bank) during this period was Rs 35,422 crore.