RBI's idea of capitalisation bonds finds favour with FinMin

Finance Ministry today said it favours the idea of raising money through capitalisation bonds to bolster balancesheets of public sector banks, as suggested by outgoing RBI Governor Raghuram Rajan.
"Capitalisation bond is an interesting and sensible idea and we are working on it," a senior finance ministry official said.
Yesterday, Rajan suggested that the government should issue 'Government Capitalisation Bonds' to tide over the capital problem.
"A less effective form of capital, if the government cannot buy bank equity directly with cash, for it is to issue the banks Government Capitalisation Bonds in exchange of equity," he had said.
If approved, the official said, these bonds would figure as capital in bank balancesheets.

RBI is working on that proposal, waiting for the fine print, the official said, adding that these bonds may be issued by individual banks and the government will give the guarantee.

The government has announced a revamp plan Indradhanush to infuse Rs 70,000 crore in state-owned banks over four years while they will have to raise a further Rs 1.1 lakh crore from markets to meet their capital requirements in line with global risk norms Basel-III.
In line with the blueprint, PSU banks were given Rs 25,000 crore in the last fiscal and an equal amount is planned for the current fiscal. As per the plan, Rs 10,000 crore each will be infused in 2017-18 and 2018-19.

Rajan had said: "The Economic Survey has suggested that RBI capitalise public sector banks. This seems a non-transparent way of proceeding, getting the banking regulator once again into the business of owning banks, with attendant conflicts of interest."
The suggestion made in this regard in the latest Economic Survey, prepared by Chief Economic Advisor Arvind Subramanian, has reportedly found traction with the government, though there is no official word on this as yet.
Rajan feels that rather than this, RBI should pay as much dividend as possible to the government, which over the past two years has run into billions of dollars.