Sources said public sector banks are unlikely to take the zero-coupon bond route for recapitalization after the Reserve Bank of India (RBI) expressed some concerns in this regard.
The government said, these banks would resort to recapitalization bonds affecting a coupon rate for capital infusion.
To save on the interest burden and ease fiscal pressure, the government decided last year to issue zero-coupon bonds to meet the capital needs of banks.
The first test case of the new mechanism was a capital infusion of ₹ 5,500 crore into Punjab and Sindh Bank by issuing zero-coupon bonds of six different maturities last year. These special securities with a tenure of 10–15 years are non-interest bearing and equal.
However, the RBI raised some concerns regarding the calculation of an effective capital infusion made at any bank through this instrument issued at par.
Since such bonds are usually non-interest bearing, but are issued at a deep discount to the face value, it is difficult to ascertain the net present value, he said.
As a result, sources said, it has been concluded to do away with zero-coupon bonds for recapitalization.
These special bonds are non-interest bearing and are issued at par in the bank, he said, adding that it would be an investment that would not accrue any returns and depreciate with each passing year.
This innovative mechanism was adopted to reduce the financial burden as the government has already spent ₹ 22,086.54 crore as interest payment for the recapitalization bond for PSBs in the last two financial years.
During FY 2018-19, the government paid 201 5,800.55 crore as interest on such bonds issued to public sector banks for pumping in the capital to meet regulatory norms under Basel-III guidelines. Can.
In the subsequent year, according to official documents, interest payments by the government tripled from .99 16,285.99 crore to PSB, as they have been holding these papers.
For the current fiscal year, the interest estimate for recap bonds has been reduced from ₹ 25,239.4 crore to ₹ 19,292.77 crore in the budget estimate.
Under this mechanism, the government issues recapitalization bonds to a public sector bank that needs capital. The said bank subscribes to the paper against which the government receives funds. Now, the money received goes as the equity capital of the bank.
So the government has nothing to give from its pocket. However, money invested by banks in recapitalization bonds is classified as an investment that earns them interest.
In total, the government has issued about 2.5 lakh crore recapitalizations in the last three financial years. In the first year, the government issued the first 80,000 crore recapitalization bonds, followed by ₹ 1.06 lakh crore in 2018-19. During the last financial year, the capital infusion through bonds, was 65,443 crores.
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