Recapitalisation plan: Weak banks may not get growth capital

Govt to issue recap bonds; no discussion on holding company route

Weaker banks are likely to be capitalised only to cover their provisioning requirements, while stronger banks would be provided capital for growth as well, sources in the finance ministry have said. Also, the Rs 1.35-lakh-crore worth of bank recapitalisation bonds — of the Rs 2.11-lakh-crore recap scheme offered by the government on Tuesday — would be issued by the government, senior officials confirmed. 

Through the recap, the government is looking to increase lending activity, especially to small and medium enterprises. It hopes the move would in turn create jobs and boost economic growth, which slumped to a three-year low of 5.7 per cent in the April-June period of FY18. The issuance of these bonds would be spread over two years, but would be mostly frontloaded over the next three-four quarters.

The finance ministry is working on the structure and mechanics of the recap bonds, including the tenure and coupon, and what parameters would govern the distribution. “There needs to be a differentiator when it comes to banks that have been better at dealing with non-performing assets (NPAs) and cleaning up their books. The modalities are still under discussion, but weaker banks may only be infused with enough capital to cover their provisioning requirements, while banks with stronger balance sheets could be given capital to cover growth needs as well,” a senior official said on Wednesday.

Though the fine print of the distribution is likely to be announced over the next few weeks, officials told Business Standard that it would also depend on the progress of cases that have been referred under the Insolvency and Bankruptcy Code (IBC), how effective their provisioning has been, and other issues.

The source, quoted above, said that the bonds would be split into two categories: Recap for provisioning and for capital growth. The source also said that before the recap began, banks might be required to clean up their books further by writing off a small portion of their NPAs, apart from the cases being referred to the National Companies Law Tribunal under the IBC. The official did not elaborate this further, saying that these were issues being discussed among policymakers.

The official, however, added the new recap bonds might not come under statutory lending ratios, would not be zero-coupon bonds and the yields would be close to the rates in the government securities market.

A second official said the Centre itself would be the issuer of the bonds and that no bank holding company would be created to possess shares of banks in exchange for the bonds. “The topic of a bank holding company has not yet been raised in internal discussions,” the person said, and added that the government was looking at similar bank recap bonds (worth Rs 20,000 crore) that were issued in the mid-1990s as a template. The bonds, issued in the mid-1990s, were deemed held-to-maturity, and then allowed to be traded in the secondary markets from 2007.

The new recap bonds may also be held-to-maturity initially, the person said.

The recap bonds would not have an impact on the fiscal deficit, apart from yearly interest payments, as there would be no cash component. The Centre would issue the bonds in lieu of equity stake in banks, the official said. 

Chief Economic Advisor Arvind Subramanian had said on Wednesday that whether the bonds add to the fiscal deficit or not would depend on the accounting. 

Under standard international accounting, such bonds will not increase deficit as they are “below-the-line” financing. But under India’s convention, these bonds would add to deficit, he had said. He had also said that the interest burden of the recap bonds on the government would be to the tune of Rs 8,000-9,000 crore and the move may not have an inflationary impact.

EMPOWERING BANKS

• Sources say discussions taking place on telling stronger from weaker banks
• Stronger banks may get capital for growth needs as well
• Banks may be required to clean books further before recapitalisation
• Some write-offs may be necessary, apart from NCLT cases
• Bonds will be deficit neutral apart from annual interest payments
• Earlier recap bond issue being taken as a template
• Bonds will not be zero-coupon; may be held-to-maturity initially and allowed to be traded later