This is expected to put severe pressure on the weaker public-sector banks. These banks will have to either shore up their capital bases or cut back on business in order to meet the RBI norms. Alternately, the centre will have to continue to provide these banks with recap funds.

The central bank's decision to impose a 5 per cent weight for market risk on government and approved securities will force banks to set aside nearly Rs 12,500 crore of their investments, which would add to their CARs.

The total investments of the banking industry for the fortnight ended October 9, 1998, stood at Rs 2,48,209 crore. Of this, investments in government securities accounted for Rs 2,16,196 crore while the balance Rs 32,013 crore was accounted for by`other approved securities' which includes investments in corporate paper.

The banks that are likely to be hit the most on account of the revised CAR norms are United Bank of India and Indian Bank, which had CARs of less than 9 per cent as on March 31, 1998. Other banks with weak CARs include Punjab National Bank, Catholic Syrian Bank and Benaras State Bank. Public sector banks were saved by the centre which recapitalised a few banks including Indian Bank and Canara Bank to the tune of Rs 1,500 crore in 1997-98. This helped these banks to improve their CARs.

However, Punjab National Bank which is planning to enter the primary market with its maiden equity issue during the next financial year, will be able to shore up its capital base and achieve the minimum CAR requirements. The bank's CAR as on March 31, 1998, stood at 8.81 per cent.

Though there are about seven foreign banks whose CARs stand at just above 8 per cent, meeting the CAR requirement of 10 per cent by March, 2002, will not be a problem forthem as the required funds will come in from their headquarters overseas. These banks include Bank of America, Citibank, Standard Chartered and Credit Lyonnais among others.

The three old private sector banks -- Catholic Syrian Bank, Bank of Rajasthan and Benaras State Bank -- had CARs much lower than the currently stipulated 8 per cent. While Bank of Rajasthan and Benaras State Bank had CARs of 5.54 per cent and 4.12 per cent respectively, Catholic Syrian Bank's CAR was as low as 3.04 per cent.

The central bank, in its monetary policy has said that while public sector banks are encouraged to raise their tier-II capital, government guarantee to these instruments would not seem appropriate. "This would mean that the weak banks, in order to shore up their capital bases, will have to access their market by themselves and raise funds at fairly high coupons," said an official with a public sector bank.

RBI has said that the implementation of the risk weightage will be implemented in phases. In the firstphase, 2.5 per cent of the risk weight will have to be set aside by the year ending March 31, 2000. The balance 2.5 per cent will be announced at a later date.

The central bank is proposing an additional 20 per cent additional risk weight of 20 per cent for securities of government undertakings which do not form part of the approved market borrowing programme, with effect from the financial year 2000-2001. This will be implemented in the case of outstanding stock of such securities as on March 31, 2000, in two phases at the rate of 10 per cent each in 2001-2002 and 2002-2003.