Along with the raise in the CAR, the Reserve Bank of India (RBI) is also set to tighten the prudential norms for asset classification, income recognition and risk weights.

The finance minister's announcement to hike the CAR to 9 per cent by March 2000 and subsequently to 10 per cent and tightening of prudential norms is in line with the recommendations of the second Narasimham Committee, set up by former finance minister P Chidambaram in December last year. The committee had submitted its report last year.

Among the nationalised banks, the Calcutta-based Uco Bank has the lowest CAR (3.16 in March 1997) followed by United Bank (8.20) and Bank of Maharashtra (9.07). Indian Bank, which has a negative (-18.81 per cent) CAR, managed to reach theRBI-stipulated 8 per cent, thanks to the government's recapitalisation funds.

The Centre pumped in Rs 5,700.00 crore towards recapitalisation of banks in 1993-94. This was followed up by a recapitalisation fund of Rs 4,813.79 crore (1994-95), Rs 850.00 crore (1995-96), Rs 1,513.00 crore (1996-97) and Rs 2,700.00 crore (1997-98). Narasimham was against Centre's assistance to banks in the form of recapitalisation funds.

ICICI Bank executive vice-president PH Ravikumar said the increase in the CAR was expected, and will lead to a spate of equity as well as debt issues to finance banks' Tier-I and Tier-II capital. However, Bank of Baroda chairman K Kannan said the increase in the CAR will not see banks coming out with public issues, since markets are not ready for these. As a precursor to any such issue, government holdings in banks should come down, he said.

The Narasimhan panel had suggested that the minimum capital to risk-assets ratio be increased to 10 per cent from its present level of 8 per cent by2002. "It would be appropriate to phase the increase as was done in the previous occasion. Accordingly, we recommend that an intermediate target of 9 per cent be achieved by year 2000 and the ratio of 10 per cent by 2002.

The RBI should also have the authority to raise this further in respect of individual banks, if in its judgement the situation with respect to their risk profile warrants such an increase," the panel had said.

The panel had made it clear that in respect of the public-sector banks, the additional requirements would have to come from the market. "With the many demands on the budget and the continuing imperative need for fiscal consolidation, subscription to bank capital funds cannot be regarded as priority claim on budgetary resources. Those banks, which are in a position to access the capital market at home or abroad, should therefore be encouraged to do so," the panel had suggested.

The committee is of the opinion that the risk weight to government-backed guarantees should be the sameas the regular advances.