Govt to infuse Rs 14,500 crore in 4 banks, issue recapitalisation bonds

Special securities shall be non-interest bearing and no interest shall be payable on issue of the securities

The government has announced an infusion of Rs 14,500 crore into Central Bank of India, Indian Overseas Bank, Bank of India and UCO Bank by issuing non-interest bearing bonds to them despite reservations raised by the Reserve Bank of India (RBI) over the use of this instrument.
 
The recapitalisation bonds would be issued with six different maturities and would be at par for the amount, in line with the application made by the eligible banks. The special securities would be repayable at par on the date of maturity.
 
No interest would be payable on issue of these securities, said the notification. This is a shift from the past when the government issued interest-bearing bonds to public sector banks.
 
To save the interest burden on recapitalisation bonds, the government last year decided to issue zero-coupon bonds for capital infusion of Rs 5,500 crore into Punjab and Sind Bank.
 
The RBI had then flagged concerns over the calculation of an effective capital infusion made into the bank through this instrument issued at par.
 
Zero-coupon bonds don’t give out interest but are issued at a deep discount to the face value, making it difficult to ascertain the net present value. The interest cost for recapitalisation bonds issued by the government was Rs 16,286 crore in the financial year 2019-20 (FY20). This has been estimated at Rs 19,293 crore for FY21. The decision to use non-interest bearing securities was taken after consultation with the RBI, said an official.
 
"The government has given nearly Rs 2.5 trillion for recapitalization of banks, and the notional loss for the government is Rs 1.13 - 1.15 trillion on share value," said another government official. The government has been paying a large sum in interest every year, he said. "This is all regulatory capital, and PSBs too need to feel the pinch," he added.

 
While this may help banks in meeting minimum capital requirements, as required by regulators, the tangible capital base would not be strengthened as much, said Prakash Agarwal, head-financial institutions at India Ratings.
 
“One way to quantify the capital infusion is to arrive at a discounted cash flow at current government papers yielding similar maturity which would be approximately around half of the face value,” he said.
 
Infusing substantial capital in all the three public sector banks — UCO Bank, Central Bank of India and Indian Overseas Bank — which were under the prompt corrective action framework, will help these lenders come out of PCA in FY22, said Anil Gupta, vice-president, financial sector ratings at ICRA.
 
“However, given the capital infusion is through zero-coupon recapitalisation bonds, the earning profile of these banks may not improve on account of this transaction as their capital position improves,” Gupta said.
 
Since the use of such bonds has been flagged by the RBI, this is not the best practice, said an analyst on condition of anonymity.
 
The government is providing much lower capital to banks than what it committed, at a time when banks are still going through the impact of the pandemic which requires their buffers to be stronger.
 
“If Ind-AS accounting norms had been applicable, these securities would have been valued at a much more discounted rate compared to the face value,” he added.
 
With the fresh move, the government’s capital infusion of Rs 20,000 crore in public sector banks for the current financial year would be complete.
 
In December, the government had infused Rs 5,500 crore into Punjab and Sind Bank.