Bank of India says it can absorb mark-down of recapitalisation bonds

Lender makes statement as central bank expresses concern at the recapitalisation of state-owned lenders through zero-coupon bonds.

State-owned Bank of India (BOI) has said it can absorb any burden of marking down recapitalisation bonds issued in lieu of equity shares to the government without fresh capital infusion. The discounting, to be done by fair-value method, could halve the bonds' value to about Rs 1,500 crore.

The lender’s Capital Adequacy Ratio was 16.66 with Common Equity tier I ratio of 13.16 per cent. On Monday. BOI stock closed 2.1 per cent lower at 51.4 per share on BSE.

The Reserve Bank of India has expressed concern at the recapitalisation of public sector banks through zero-coupon bonds (ZCBs), raising the issue of banks' capital adequacy falling below regulatory norms.

BOI will be able to absorb Rs 1,500 crore of discounting on bonds worth Rs 3,000 crore. Also retained profits of Financial Year 2021-22 will be more than adequate to meet regulatory norms and business growth in next year, BOI executives said.

Unlike previous years, when the government had infused capital through interest-bearing recapitalisation bonds, in FY-2021 it was done through zero-coupon bonds (ZCBs) that are redeemable at face value.

Anil Gupta, vice president, financial sector ratings at ICRA, said amongst public sector banks, Punjab & Sindh Bank (P&SB) is getting Rs 4,600 crore equity capital infusion from the government. This is perhaps to address the possibility of P&SB’s capital adequacy falling below the regulatory minimum level as recapitalisation bonds are marked down.

Last week, the board of a Delhi-based public sector lender approved a plan for allotting equity shares up to Rs 4,600 crore, including share premium, to the Government of India by way of preferential issue.  Its capital adequacy ratio stood at 17.82 per cent with Common Equity tier I (CET1) of 12.34 per cent at end of December 2021.