Rs 800-bn bank recapitalisation bonds to have 10-15-year tenure: Jaitley

Coupon rate fixed at 7.35-7.68%

The Central government on Tuesday gave the details of its Rs 800 billion recapitalisation bonds for banks through six maturities, and they will not disturb the market dynamics of the fixed-income paper,  experts said.

Sentiment in the market may improve because the coupons for the bonds were a bit below the closing rates for papers of similar maturities, according to analysts.

The Rs 800-billion recapitalisation bonds would have a tenure of 10-15 years and would carry a coupon rate in the range of 7.35-7.68 per cent, the finance ministry said in a notification.

Termed “non-transferable special government of India security”, the bond will carry a rate of interest, also known as the coupon rate, of 7.35 per cent for bonds maturing in 2028, 7.42 per cent for 2029, 7.48 per cent for 2030, 7.55 per cent for 2031, 7.61 per cent for 2032, and 7.68 per cent for 2033.

“The papers are non-SLR [statutory liquidity ratio] and not for trading. Besides, the fact that the rates are at par, or slightly below the closing rates of similar maturity benchmark papers, shows they won't have any detrimental effect on sentiment in the market,” said Harihar Krishnamurthy, head of Treasury at First Rand Bank. 

The 10-year benchmark bond closed at 7.434 per cent on Tuesday. 

The appetite of banks to invest in bonds will not be affected because the recap bonds cannot be counted to calculate the statutory liquidity ratio (SLR), or mandatory bond holding of banks, currently at 19.5 per cent of their deposit base. 

Bond rates have risen sharply in recent days as US yields hardened and jumped 13 basis points on Monday after Chief Economic Advisor Arvind Subramanian said the scope for cutting rates by the Reserve Bank of India was no longer there because of rising inflation. 

Besides, the Economic Survey, released on Monday, hinted that the fiscal consolidation target could be relaxed. The market interpreted it as higher borrowing for the next fiscal year. The consensus for gross borrowing numbers, before the Economic Survey report, was Rs 6.5-6.7 trillion. That number may well be surpassed in the Budget announcement on February 1.

Economic Affairs Secretary Subhash Garg had said last week the coupon rate would be priced at three months’ average of government securities plus the spread.

State Bank of India will get the highest infusion, at Rs 88 billion, through recapitalisation bonds, followed by IDBI Bank at Rs 78.8 billion and Bank of India at Rs 69.7 billion.

“The special security shall not be transferrable and conversion in any other form of security shall not be permitted,” a notification, dated January 29, from the Ministry of Finance said. 

The government had set strict terms for issuing the recapitalisation bonds. The terms include creating a stressed asset management vertical, tying up with agencies for specialised monitoring of loans above Rs 2.5 billion, strict surveillance of big loan defaulters, and appointing a whole-time director for monitoring reforms every quarter. Department of Financial Services Secretary Rajiv Kumar didn’t reply to a text message seeking his response on whether all the public sector banks had agreed to the terms of the recapitalisation bonds.

The Centre had last week announced a Rs 881-billion capital infusion in 20 public sector banks (PSBs), with a major chunk flowing into weaker banks. 

The government will infuse the remaining Rs 81 billion from its own finances. IDBI Bank, Bank of India, Bank of Maharashtra, Central Bank of India, Dena Bank, Indian Overseas Bank, and UCO Bank are among the banks that will get additional funds from gross budgetary support. All these banks are facing prompt corrective action by the Reserve Bank of India. 

Eleven banks facing prompt corrective action by the Reserve Bank of India will receive Rs 523 billion this financial year while comparatively healthy banks will receive Rs 358 billion through the recapitalisation programme.

The recapitalisation programme is of Rs 2.11 trillion, to be done in phases. Apart from the Rs 800 billion in bonds, the balance Rs 1.35 trillion will be mobilised through budgetary support and market borrowing, which is expected to hit the market in 2018-19. 

The previous recapitalisation bonds, done in the 1990s, have not yet matured because the government increased their maturity profile.