The government plans to cut off recapitalization funds to all but its biggest banks, leaving the thousand or so outside the top 60 with no access to state funds under a new bill.

Under the proposed legislation, only banks with a minimum of 50 billion rubles ($1.6 billion) in assets will be eligible for state funds to shore up their capital, thereby allowing the government to avoid subsidizing minor players.

The state would pay for preference shares in commercial banks with OFZ treasury bills to be issued for the purpose in 2009 and 2010, with maturity in 2019, according to a draft of the bill approved by relevant ministries and the Central Bank.

Trust Bank analysts estimate that 64 Russian banks had assets of no less than 50 billion rubles as of May 1, while the 50 biggest banks held 83 percent of total banking assets.

Russia's 1,100-plus banks may need 500 billion rubles of extra capital should nonperforming loans climb to 10 percent to 12 percent, which would totally erase bank profits, a top Central Bank official has said.

The proposed mechanism for recapitalization would allow the banks to use the OFZ bonds as collateral for Central Bank refinancing funds, saving the state budget, in deficit for the first time in a decade, from added spending.

Authorities have said repeatedly that only banks of "systemic" importance could apply for state support, and Alfa Bank president Pyotr Aven has said hundreds of small Russian lenders could go bankrupt.

The banks that apply for the recapitalization program would be able to request the equivalent of 100 percent of their Tier 1 capital as reported on July 1, 2009.

After 10 years, the applicants could buy the preference shares back from the state or they could be converted into ordinary shares.

The bill also proposes an increase in the permissible ratio of preferred shares to 75 percent of total charter capital from the current 25 percent, a measure designed to speed up the recapitalization process.

Should the state become a shareholder in the bank, it would receive the right to veto mergers and acquisitions, new share issues and remuneration for senior executives.

nVTB Group said Friday that bad debts within the bank could rise to $9 billion by June 2010. "The possible volume of problem loans that may be transferred to the debt center in the period between July 2009 and June 2010" is $9 billion, VTB spokesman Maxim Lunyov said.

VTB is struggling with losses as deteriorating assets erase its profits and eat into capital, forcing the state to allocate 200 billion rubles for capital injections later this year.