Public sector lender Punjab & Sind Bank is set to dilute a 25-30 per cent stake through private placement of equity by October for raising Rs 1,000 crore to finance its expansion.

The Delhi-headquartered bank had favoured private placement over an initial public offer due to the stock market's volatility, a source familiar with the development said. "An initial public offer now is out of question," the source said.

The private placement of shares is likely to be with public sector companies Life Insurance Corporation, UTI and Small Industries Development Bank [Get Quote] of India [Get Quote] but private sector participation is not completely ruled out.

"It all depends on the interest in the private sector," a source said.

Prior to the private placement, the government will restructure the bank's equity capital to increase its attractiveness to the investors. Out of its Rs 743 crore paid-up capital, it will convert nearly Rs 550 crore into preferential shares and debt instruments.

There may also be concessions on the returns offered on preferential capital and the debt, at least in the initial years.

The equity restructuring is likely to be completed by August-end. After the restructuring, pure equity will come down to nearly Rs 180 crore from Rs 743 crore, sources said. The Union Cabinet is likely to discuss the bank's capital restructuring and private placement plan soon.

After being the only loss-making public sector bank in 2004-05 with a Rs 71 crore hit, the bank has reported profits in the last three financial years.

"Being a medium-sized bank, the bank needs to scale up business faster to gain size. For that, the bank urgently needs capital," the sources said. The bank's capital adequacy ratio stood at 11 per cent.

Aggressive bad debt recovery has helped Punjab & Sind Bank reduce the level of gross non-performing assets from 17.17 per cent in 2004-05 to 0.74 per cent in 2007-08. Its net worth rose from Rs 345 crore to Rs 1,505 crore during the period.

The bank's total business (deposits and advances) grew 56 per cent to Rs 49,805 crore as on June 30, 2008, from Rs 31,811 crore a year ago.

The bank's gross advances went up 74 per cent to Rs 20,556 crore, while deposits rose 46 per cent to Rs 29,248 crore during the period.