DENA Bank, Andhra Bank, Vijaya Bank and UCO will benefit the most, with
the government decision to infuse capital into commercial banks to
improve their capital adequacy ratio (CAR).
The government has announced that it would provide banks access to finance to raise their capital adequacy ratio (CAR) up to 12%. CAR is the amount of capital that banks need to set aside as a prudential practice based on the risk associated with various assets.
Among government-owned banks, Dena Bank, Andhra Bank and UCO Bank have a CAR of less than 12% and its shareholding in these banks has nearly touched 51% — a level below which the government can not reduce its stake if it wants to raise fresh equity.
In a release, the government has said that details of the capitalization scheme are being worked out. However, it has not clearly spelt out if the capitalization is only for public sector (PSU) banks or if the scheme could be extended to private banks as well. In case of PSU banks, since the government holding cannot dip below 51%, several banks are not in a position to raise fresh capital. However, in case of Oriental Bank of Commerce, while government holding is 51.09%, its capital adequacy ratio stood at 12.12% as of March 2008. While in case of UCO Bank, even as its CAR is lowest at 10.09% as of March 2008, government holding is at 74.98%. This means that the bank can tap the stock market to raise fresh equity. However, low sentiment in the capital market can be an impediment.
In case of Vijaya Bank, while the government holding is at 53% leaving very little headroom to raise equity capital, its CAR is at 11.22%. But Dena Bank and Andhra Bank will benefit the most since its CAR is at below 11% and government holding is around 51%.
Substantial increase in credit offtake will force banks to set aside more capital in the form of CAR. Banks have seen a much higher lending this fiscal. As of end-September, loans grew Rs 1, 80,554 crore (7.6%) compared to Rs 1, 06,290 crore (5.5 %) in the same period a year ago. The demand for loans continues to grow prompting banks to offload their stock of surplus bond holdings to fund the demand from borrowers.
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