Public sector banks are planning for expansion to meet their capital requirements for the next financial year. Bank of Baroda, Bank of India and Corporation Bank are some names in the league. While Bank of Baroda and Bank of India have plans to raise Rs. 2000 crore each, Corporation Bank has a target of Rs. 1500 crore in the upcoming fiscal.

These expansion plans will be elicited by economic and financial improvement like strong economic growth, rise in index of industrial production (IIP), fresh capital expenditures (capex) and also a rise in level of consumer confidence.

"The capital raised will be towards Tier-I and Tier-II capital of the bank," said J M Garg, chairman and managing director of Corporation Bank.

As per RBI norms, all banks need to maintain a minimum Tier I capital adequacy ratio (CAR) of 6% and an overall minimum CAR of 9% for commercial banks.

CAR is the expressed as the ratio of capital fund to risk weighted assets.

Although most PSBs have CAR above 9 %, banks want to gear up more capital with an expectation of rise in credit growth. "But as credit growth is expected to pick up, we will need additional capital," said S Kothandaraman, general manager, Bank of India.

Bank of India has raised capital worth Rs 2,300 crore in the current fiscal. According to estimates by HDFC securities credit growth for the banking system is expected at around 19 % in FY11 and 20 % in FY 12.

"The capital requirement for FY11 will be Rs 2,000 crore and for the current fiscal the capital raised was Rs 1,300 crore," said M D Mallya, chairman and managing director, Bank of Baroda.

But many public sector banks are lagging back in the race. "Over and above the 6% Tier I capital, Finance Ministry considers 8% as the optimal level. Many public sector banks are falling short of this optimal level. These include Bank of Maharashtra, Central Bank of India, UCO Bank, Syndicate Bank and Dena Bank," said Anand Dama, banking analyst at Networth Stock Broking.

The budget 2010-11 has set aside Rs. 16,500 crore for recapitalization of public sector banks. This boost up package will help these banks meet their short term capital requirements.