Govt unlikely to continue with zero-coupon bond route to recap PSU banks

The government is unlikely to take zero-coupon bond route to further recapitalise public sector banks after the Reserve Bank expressed some concerns in this regard, sources said.

The government, they said, would resort back to recapitalisation bonds bearing a coupon rate for capital infusion in these banks.

To save interest burden and ease the fiscal pressure, the government last year decided to issue zero-coupon bonds for meeting the capital needs of the banks.

The first test case of the new mechanism was a capital infusion of Rs 5,500 crore into Punjab and Sind Bank by issuing zero-coupon bonds of six different maturities last year. These special securities with tenure of 10-15 years are non-interest bearing and valued at par.

However, the RBI raised some concerns with regard to calculation of an effective capital infusion made in any bank through this instrument issued at par, sources said.

Since such bonds usually are non-interest bearing but issued at a deep discount to the face value, it is difficult to ascertain net present value, they added.

As a result, sources said, it has been concluded to do away with zero-coupon bond for recapitalisation.

These special bonds are non-interest bearing and issued at par to a bank, they said adding that it would be an investment that would not earn any return and rather depreciate with each passing year.

This innovative mechanism was adopted to ease the financial burden as the government has already spent Rs 22,086.54 crore as interest payment towards the recapitalisation bonds for PSBs in the last two financial years.

During FY 2018-19, the government paid Rs 5,800.55 crore as interest on such bonds issued to public sector banks for pumping in the capital so that they could meet the regulatory norms under the Basel-III guidelines.

In the subsequent year, according to the official document, the interest payment by the government surged three times to Rs 16,285.99 crore to PSBs as they have been holding these papers.

For the current financial year, interest payment for recap bonds have been reduced to Rs 19,292.77 crore from Rs 25,239.4 crore pegged in the Budget estimate.

Under this mechanism, the government issues recapitalisation bonds to a public sector bank which needs capital. The said bank subscribes to the paper against which the government receives the money. Now, the money received goes as equity capital of the bank.

So the government doesn't have to pay anything from its pocket. However, the money invested by banks in recapitalisation bonds is classified as an investment which earns them an interest.

In all, the government has issued about Rs 2.5 lakh crore recapitalisation in the last three financial years. In the first year, the government issued Rs 80,000 crore recapitalisation bonds, followed by Rs 1.06 lakh crore in 2018-19. During the last financial year, the capital infusion through bonds was Rs 65,443 crore.