The Central Government has worked up a plan to infuse money worth Rs. 35,000 crore to public sector banks in the next two years. The step has been taken on the note of meeting the credit requirement of the economy.

As per the RBI norms, a minimum 6% Tier I capital needs to be maintained by banks. The proposed capital infusion will allow the banks to maintain an 8% Tier-I capital adequacy ratio (CAR).

A bank's capital comprises of Tier I and Tier II capital. Tier I capital consists of equity share capital, share premium and reserves and surplus.

As per a finance ministry official, the state owned banks will be getting this infusion once the proposal gets approved by the cabinet. The union budget has already announced the recapitalization aid to public sector banks worth Rs. 16,500 crore.

The government review shows that the total capital requirement of public sector banks over the next two years is around Rs 38,000 crore. "We've already approved a capital support of Rs 4,600 crore to four banks, of which Rs 1,900 crore has already been disbursed," said a finance ministry official.

The vital reason behind this capital infusion drive is that the banking system should not suffer from problems regarding capital adequacy. Also capital infusion is necessary for banks like Dena Bank, Oriental Bank of Commerce and Andhra Bank which will not be able to enter the capital market till 2011 as the government holding in these banks is more than 51%.

Basel II norms state that banks have to maintain a capital adequacy ratio (CAR) of 12 % inclusive of Tier I and Tier II capital. Basel norms can be regarded as regulations set for banks so as to protect the interests of depositors in a bank.

"We may infuse equity capital or use innovative Tier-I instruments such as innovative perpetual debt instruments, or perpetual non-cumulative preference shares," said the finance ministry official.

"The move will also help banks to raise Tier-II capital, which will have a multiplier affect on their credit lending and ratings both in international and domestic markets," said a senior State Bank of India (SBI) official.