The finance ministry has taken an ‘in principle’ decision to form a holding company which will raise funds abroad and infuse fresh capital in state- run banks, including State Bank of India (SBI).

The plan is yet to be fleshed out fully and in its final shape will go before the cabinet committee on economic affairs for consideration and adoption. This may be done before Parliament’s winter session, likely to open on November 21.

It is estimated that these banks need a fresh capital infusion of Rs 18,000 crore to Rs 20,000 crore. This year’s budget allocates only Rs 6,000 crore for the purpose with a commitment not to take the government’s equity below 58 per cent.

Finance minister Pra­nab Mukherjee is likely to seek another Rs 4000 crore in additional funds for the purpose by raising supplementary demands for grants – lower than the banking division’s recommendation of Rs 6,000 crore.

According to the latest proposal, the additional money will go into the holding company as capital, which will be leveraged to raise resources abroad for capitalisation of the banks.

Two options are open on the ownership pattern of the government-run banks. One, let the holding company to hold part of the government’s equity in the banks. Two, transfer all government equity in favour of the holding company, of which the government will be the sole owner.

“Once Parliament approves the supplementary grants, the government will decide how much money the holding company needs to raise abroad,” according to an official privy to the decision.

Finance secretary R SGujral chaired a meeting of the committee on capital requirements of financial institutions on Thursday to explore various ways of meeting the 8 per cent tier I capital requirements of banks. SBI, Bank of India, Bank of Baroda, Syndicate Bank and Indian Bank are the ones which will have the first capital infusion this in two tranches this year.

"We will hopefully decide on the capital infusion by Tuesday,” financial services secretary DK Mittal told media after the meeting. He gave no more details. “The timing of raising funds abroad will be key, given the rupee’s depreciation, the Euro zone crisis and no recovery in the US,” said another official.

Earlier at the economic editors’ conference the finance minister had spoken of passing supplementary grants, if required. He had set up the committee on capital requirements with the finance secretary in the chair. It is required to come up with recommendations by November 15. The total with capital requirements of all the banks are estimated to be Rs 3,50,000 crore. Last year the government provided capital support of Rs 20,157 crore to a host of banks owned by it. Other options include issue of preferential allotment of warrants, preferential shares etc.

On Monday the Reserve Bank of India (RBI) pointed to urgency need for capital infusion into public sector banks in view of rising bad assets. Mukherjee had spoken of fresh capital for SBI after it was downgraded by Moody’s for the bank’s below par tier I capital and worsening asset quality.