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THE government has approved the recapitalisation of three public sector banks (PSBs), Uco Bank, Vijaya Bank and Central Bank of India, by infusing Rs 3,800 crore. Under the approved recapitalisation plan, the government would infuse Rs 1,400 crore into the Central Bank of India while Vijaya Bank and Uco Bank would get Rs 1,200 crore each, home minister P Chidambaram told reporters after the Cabinet meeting here.

The fund infusion would increase the banks’ capital adequacy ratio (CAR) to more than the desired level of 12%. CAR, or capital-to-risk weighted asset ratio (CRAR), is linked to the lending of banks. A higher CAR means the bank is in a good health and can lend more.

The three banks had a CRAR of less than 12% as on June 30. However, none of them had a CRAR ratio of less than 9%, the prescribed limit under Basel-II norms.

The government will be subscribing to the tier-I innovative capital instruments which banks will float in two tranches. As part of the first tranche, Uco Bank will get Rs 450 crore while Central Bank of India and Vijaya Bank will get Rs 700 crore and Rs 500 crore, respectively, in the current fiscal.

The government will infuse capital into Uco Bank by subscribing to its non-convertible preference shares, which qualify for tier-I capital. The bank will pay 6.5% interest per annum to the government on the instrument.

Reacting to the news, Uco Bank chairman and managing director SK Goel said that the bank’s capital adequacy would now improve to above 12% from 10.68% as on December 31, 2008. More importantly, the tier-I capital, which is the core capital for banks, will improve to above 6% from 5.44% now.

“The government will provide Rs 450 crore in February itself. The remaining Rs 750 crore will be infused around June-July 2009,” Mr Goel indicated.

Improvement in the tier-I capital means Uco Bank would get an additional headroom of Rs 1,200 crore by selling bonds. “This will provide us cushion to increase capital in future by way of tier-II bonds,” Mr Goel said.

The other bank to get Rs 1,200-crore infusion is Vijaya Bank. Its CMD Albert Tauro said, “The Union government is holding 53.87% and there is little room for further dilution. So this (infusion) would either be in the form of preference shares or a perpetual debt instrument so that the government holding remains intact,” Mr Tauro added. Unlike State Bank of India’s rights issue, when the Union government provided the funds in the form of bonds, the infusion into Vijaya Bank is expected to be in cash.

Mr Tauro said the bank is projecting both its advances and deposits to grow by 21% this fiscal, and the same line of growth next fiscal. Till date, Vijaya Bank’s CAR is 11.4%, with a paid-up capital of Rs 433.52 crore and reserves of Rs 1,672.89 crore. Post the fund infusion, Vijaya Bank expects its CAR to be over 12.5%.

Incidentally, Mr Tauro has been involved with both Central Bank of India and Vijaya Bank, holding the post of executive director at the former before taking over over as chairman and managing director of the Bangalorebased bank.

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