The intrinsic net-worth of bonds being used to infuse capital worth Rs 14,500 crore in four public sector banks (PSBs) will be 50 per cent lower than similar maturity government papers in the market, according to rating agency India Rating.
The illiquid, non-trading nature of these securities could add to the discount. So it may not strengthen their tangible equity by as much but may bolster regulatory norms.
The Government of India has decided to infuse Rs 14,500 crore in four PSBs – Central Bank of India - Rs 4,800 crore, IOB – 4,100 crore, Bank of India Rs 3,000 crore and UCO Bank Rs 2,600 crore. This infusion is from the remaining budgetary allocation for FY21, through the issue of non-interest bearing (non-transferable) special government securities with maturities ranging from 2031 to 2036.
Rating agency said these bonds will be issued at par to the participating banks and the date of issuance will be the date on which the subscription amount is received from these PSBs. The government allocated Rs 5,500 crore to P&SB in 3QFY21.
“The agency understands that these long-tenor securities would be factored at par value rather than the discounted value in the banks’ balance sheet. These banks have weak tangible buffers or a weaker ability to build and maintain capital buffers”, it added.
Despite fiscal constraints, the government has been supportive over the years in terms of capital infusion in PSBs. It infused Rs 2.5 trillion over FY18-FY20 alone. While prior to FY18, the government would do a direct infusion of equity in PSBs, FY18 onwards the government has used recapitalisation bonds. This involved banks subscribing to the recapitalisation bonds issued by the GoI with a maturity ranging between 10-15 years and coupon rates of 7.4-7.7 per cent.
The government would then use the funds raised to be infused back in PSBs as equity. PSBs would hold these securities in their investment portfolio under the held-to-maturity category, it added.