Government unlikely to continue with zero-coupon bond route to recap PSU banks – Times of India

NEW DELHI: The authorities is unlikely to take zero-coupon bond route to additional recapitalise public sector banks after the Reserve Bank expressed some issues on this regard, sources stated.
The authorities, they stated, would resort again to recapitalisation bonds bearing a coupon price for capital infusion in these banks.
To save curiosity burden and ease the fiscal stress, the federal government final yr determined to difficulty zero-coupon bonds for assembly the capital wants of the banks.
The first check case of the brand new mechanism was a capital infusion of Rs 5,500 crore into Punjab and Sind Bank by issuing zero-coupon bonds of six completely different maturities final yr. These particular securities with tenure of 10-15 years are non-curiosity bearing and valued at par.
However, the RBI raised some issues with regard to calculation of an efficient capital infusion made in any financial institution via this instrument issued at par, sources stated.
Since such bonds often are non-curiosity bearing however issued at a deep low cost to the face worth, it’s troublesome to verify web current worth, they added.
As a consequence, sources stated, it has been concluded to do away with zero-coupon bond for recapitalisation.
These particular bonds are non-curiosity bearing and issued at par to a financial institution, they stated including that it might be an funding that might not earn any return and slightly depreciate with every passing yr.
This progressive mechanism was adopted to ease the monetary burden as the federal government has already spent Rs 22,086.54 crore as curiosity fee in the direction of the recapitalisation bonds for PSBs within the final two monetary years.
During FY 2018-19, the federal government paid Rs 5,800.55 crore as curiosity on such bonds issued to public sector banks for pumping within the capital in order that they might meet the regulatory norms beneath the Basel-III tips.
In the following yr, in accordance to the official doc, the curiosity fee by the federal government surged 3 times to Rs 16,285.99 crore to PSBs as they’ve been holding these papers.
For the present monetary yr, curiosity fee for recap bonds have been diminished to Rs 19,292.77 crore from Rs 25,239.4 crore pegged within the price range estimate.
Under this mechanism, the federal government points recapitalisation bonds to a public sector financial institution which wants capital. The stated financial institution subscribes to the paper towards which the federal government receives the cash. Now, the cash obtained goes as fairness capital of the financial institution.
So the federal government does not have to pay something from its pocket. However, the cash invested by banks in recapitalisation bonds is classed as an funding which earns them an curiosity.
In all, the federal government has issued about Rs 2.5 lakh crore recapitalisation within the final three monetary years. In the primary yr, the federal government issued Rs 80,000 crore recapitalisation bonds, adopted by Rs 1.06 lakh crore in 2018-19. During the final monetary yr, the capital infusion via bonds was Rs 65,443 crore.

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