Issued at a deep low cost to the face worth, these bonds are non-interest bearing. This means it’s an funding that doesn’t earn any returns, however depreciates in worth over time.
“Typically, a bond earns interest but since these are not earning any interest, the value of Rs 100 invested today is actually lower than that invested in a government security of a similar maturity,” Agarwal stated.
On Tuesday, the federal government notified capital infusion totalling Rs 14,500 crore via these bonds in Central Bank of India, UCO Bank, Bank of India and Indian Overseas Bank. It adopted an identical Rs 5,500-crore infusion in Punjab and Sind Bank within the quarter ended December.
The Reserve Bank of India (RBI) had then flagged considerations on these devices due to the anomaly round their valuation. It is unclear whether or not the finance ministry has addressed the central financial institution’s considerations earlier than issuing these bonds.
The valuation of this fairness infusion can also be necessary as these banks are probably candidates for disinvestment.
Ind-Ra stated the zero coupon nature of those devices together with the illiquid, non-trading nature of those securities might add to its low cost.
“Equity levels are an important factor in the banks’ ability to service Basel III Additional Tier 1 and Tier 2 bonds. While the quantum of these instruments is limited in the total equity profile of most of these PSBs, the notching down for their Tier II bonds and additional Tier I bonds from the long-term issuer ratings and the standalone rating, respectively, could widen,” Ind-Ra stated.
Typically, the federal government points capital via the cash raised by the paper subscribed by the identical PSU banks. But they earn curiosity on these financial institution’s steadiness sheets. With the zero coupon bonds, the banks will not profit from that earnings.
Since FY18, the federal government has used recapitalisation bonds with banks subscribing to them with a maturity ranging between 10 and 15 years, and coupon charges of seven.4 per cent-7.7 per cent. The authorities would then use the funds raised to be infused again in PSBs as fairness.
PSBs would maintain these securities of their funding portfolio below the held-to-maturity class. The authorities paid Rs 5,800 crore in curiosity funds on these bonds in FY19 and Rs 16,209 crore in FY20, Ind-Ra stated.
“Assuming a 6 per cent yield on the total Rs 20,000 crore infused by the government in FY21, banks could lose Rs 1,200 crore in interest. The fact is that these banks will benefit from the capital infusion but will have to bear the costs of holding these instruments in their books,” stated Karthik Srinivasan, group head, monetary sector rankings, ICRA.
The authorities has allotted one other Rs 20,000 crore for fairness infusion in these lenders for this fiscal. It stays to be seen whether or not the federal government continues with these devices to concurrently infuse capital and save curiosity price.