Liquidity comfort for state-run banks

RECAP BONDS

The conversion will, however, reduce the Tier-I capital of the nationalised banks.

The Budget has proposed to convert Rs 22,808 crore of recapitalisation bonds issued to 19 nationalised banks into tradable, statutory liquidity ratio (SLR) securities. The move will provide comfort to banks facing a liquidity crunch.

The proposal will help generate liquid cash from the sale of tradable securities. The move comes at a time when the banking system is starved of cash.

Union Bank of India CMD Cherian Varghese said, "The conversion of non-tradable securities into tradable ones will be helpful as the system is still grappling with cash crunch. Any bank can sell the tradable securities to earn liquid cash. It will not have any significant impact on the gilt market. It largely deals with banks' cash requirement."

Mohan Shenoi, group president - treasury, Kotak Mahindra Bank, said, "The conversion of non-tradable special securities into tradable SLR government securities will give an additional cash advantage to banks. As per the earlier arrangement between the government and nationalised banks there was no cash involved."

The conversion will, however, reduce the Tier 1 capital of the nationalised banks. But the impact is expected to be negligible. All the nationalised banks collectively had a capital adequacy ratio of 13.2 per cent as on March 31, 2005.

As part of the reforms in 1993-94, capital was infused through these bonds into those banks whose net worth eroded on account of provisioning for non-performing assets. This capital was treated as tier-I capital. The government had injected Rs 16,809 crore into nationalised banks. Inclusive of perpetual securities issued in the early 1990s, total net capital support provided by the government to banks stands at Rs 22,808 crore.

Total investments by banks in government securities at present stand at Rs 7,00,595 crore, up by just over one per cent compared with a year ago.