After the rating of SBI were downgraded by Moody's citing rising stress on the loan portfolio and capital constraints. The Government of India is set to provide funds to the largest public sector Bank of India. The Government says that it is going to infuse fresh capital in SBI so that Tier-1 (equity) capital becomes at least 8%. Its worth note that SBI's Tier I capital adequacy ratio dipped to 7.6% after it set aside funds to meet pension liabilities. Its bottom line has also taken a severe beating, following steep rise in provisions for bad debt.
The tool through which funds would be provided or the quantum of capital infusion has not been disclosed but the bank had proposed a rights issue of Rs 20,000 crore, requiring the government to chip in with nearly Rs 12,000 crore to maintain its stake at around 59%.
Fact Box: Tier I and Tier II Capital
Capital Adequacy Ratio is a requirement imposed on banks to have a certain amount of capital in relation to their ASSETS, i.e., loans and investments as a cushion against probable losses in investments and loans. In simple terms, this means that for every Rs.100 of risk-weighted assets, a bank must have Rs. X in the form of capital. Capital is classified into Tier I or Tier II. Tier I comprises share capital and disclosed reserves, whereas Tier II includes revaluation reserves, hybrid capital and subordinated debt. Further, Tier II capital should not exceed Tier I capital. The risk weightage depends upon the type of assets. For example, it is zero on government guaranteed assets, 20 percent on short-term bank claims on 100 percent on private sector loans. The capital adequacy ratio is percentage of total capital funds to the total risk-weighted assets.