The Union Cabinet on Friday approved a capital infusion of Rs.15,000 crore in public sector banks (PSBs) during the current fiscal to facilitate an increase in their lending capacity by about Rs.1.85 lakh crore.

According to an official statement on the cabinet decision taken at a meeting chaired by Prime Minister Manmohan Singh, a sum of Rs.15,000 crore — already provided for in the budget for 2010-11 — is to be infused in Tier I capital instruments of the PSBs.

The exact amount, the mode of capitalisation and other terms and conditions would be decided in consultation with the banks at the time of the infusion, it said. For the next fiscal (2011-12), additional capital requirements, if any, is to be worked out in consultation with the PSBs based on their third quarter results for 2010-11 to ensure that they maintain a minimum 8 per cent Tier I capital to meet the credit requirements of the economy and accelerate growth.

Explaining the need for additional funding of PSBs, the statement said: “The infusion of Rs.15,000 crore in Tier I capital instruments of PSBs would enable them to expand their credit growth by about Rs.1.85 lakh crore.

This additional availability of credit is likely to benefit employment oriented sectors, especially agriculture, micro & small enterprises, export and entrepreneurs, in promotion of their economic activities which would in turn contribute substantially to the growth of the economy.”

The government, the statement said, decided on capital infusion of PSBs to ensure that the banking system does not suffer from capital adequacy constraints and the credit growth needed to sustain the economic momentum in 2010-11 is maintained. “The capital infusion would enhance the lending capacity of PSBs that are expected to continue meeting credit requirements of the economy in order to maintain and accelerate economic growth,” it said. For this purpose, it may be recalled that in the wake of the recent global financial crisis, the government had negotiated with the World Bank for two ‘Banking sector support loans (BSSL)' amounting to $3.2 billion. Formalities in respect of the first tranche of $2 billion loan have already been completed, the statement said.

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