Capital Adequacy Ratio (CAR) of seven public sector banks is expected to gear up to 12% after the injection of Rs 3,000 crore by the government. Finance Minister P Chidambaram said that the government will infuse this capital to improve the financial heath and CAR of the banks.

Chidambaram said on Wednesday: "Today I announce with the Prime Minister's permission that banks which have CRAR of below 12 percent, well above 8 percent Basel norm, well above 9 percent RBI stipulated norm... we will help them recapitalize and bring them (CRAR) above 12 percent."

PSUs that are likely to benefit from the capitalization include Central Bank of India, Vijaya Bank, Bank of Maharashtra, Uco Bank and Indian Overseas Bank. All these banks have their Capital to Risk-Weighted Assets Ratio (CRAR) below 12%.

"The details of the capitalization scheme are being worked out," the finance minister said. He pointed out CRARs of Indian banks were well above the Basel norm of 8% and RBI-stipulated norm of 9% but this move from government's side would improve market confidence in the banking system.

This seems to be a precautionary measure to avoid any kind of risk at a time of global financial turmoil. Also to lower the impact of slowdown, finance minister declared that the government has decided to provide finance to the banks for raising their CRAR's to 12% from the existing range of 10-12%.

Capitalization by the government will be taken through debt instrument such as tier-II bonds or preference shares, which will issued by the banks and subscribed by the government.

Chairman and Managing Director of Bank of Maharashtra, Allen C A Peirera said, "We need around Rs 300 crore to achieve a CRAR of 12 percent from 10.9 percent now. Currently, we do not have any headroom to raise capital through tier-II bonds from the market."

Punjab & Sind Bank's CRAR increased to 12.5% after raising capital worth Rs 400 crore but the bank still needs further capitalization. Chairman of Punjab & Sind Bank, R P Singh said, "Our business has grown by 74 percent as on June 30 this year over the corresponding period last year. We need more capital to sustain the growth to expand our balance sheet."

A senior official from a PSU Bank feel that raising debt from the government instead of market will prove cheaper during this time of trouble. Although the growth of PSU Banks have been excellent even during these odd times, recapitalization is necessary to handle any challenge that may come ahead.