Recap bond conversion to save govt Rs 600 cr

The government is expected to save over Rs 600 crore through the recapitalisation of non-tradable special securities into tradable bonds for the weaker public sector banks.

The banks being shortlisted include Dena Bank, Indian Bank, Punjab & Sind Bank, United Bank and Central Bank of India.

"The recapitalisation of about Rs 20,000 crore of special securities will save around Rs 600 crore for the government," a senior finance ministry official said.

While the government will save on annual interest burden due to lower interest burden, banks will be able to generate additional liquidity by selling these securities once these become tradable.

While Indian Bank has the maximum non-tradable securities, Punjab and Sind Bank has about Rs 1,240 crore worth of non-tradable special securities.

"The banks will be able sell the securities and generate funds for lending at 10-11 per cent. They will not suffer on account of lower interest rates," the official said.

The tradable securities will be treated as part of the banks' capital and provide them with further headroom for implementing the stringent Basel II norms in 2007 as it will help bring down the capital adequacy ratio of the banks.

Special securities carry an interest rate of 10 per cent while the tradable bonds carry market-related returns of about 7 per cent. A difference of three per cent will translate into savings of Rs 600 crore on Rs 20,000 crore worth of special securities.

The government had infused Rs 16,809 crore into the nationalised banks and along with perpetual securities issued earlier, the total stands at Rs 22,808 crore.