Authorities unlikely to pursue zero coupon bond path to recap PSU banks


NEW DELHI: Authorities unlikely to take zero coupon bond path to additional recapitalize public sector banks after the reserve financial institution expressed some issues on this regard, sources mentioned.
The federal government, they mentioned, would resort to recapitalization bonds carrying a coupon price for capital infusion in these banks.
To avoid wasting curiosity cost and relieve the tax burden, the federal government determined final yr to concern zero coupon bonds to satisfy the capital wants of banks.
The primary take a look at case of the brand new mechanism was a capital injection of Rs 5,500 crore within the Punjab and Sind Financial institution by issuing zero coupon bonds of six totally different maturities final yr. These particular securities with a period of 10 to fifteen years don’t bear curiosity and are valued at par.
Nevertheless, the RBI has raised some issues concerning the calculation of an efficient capital injection made into any financial institution by means of this instrument issued at par, sources mentioned.
Since these bonds typically don’t bear curiosity however are issued at a steep low cost to their face worth, it’s tough to find out the online current worth, they added.
Because of this, based on sources, it was concluded to take away zero coupon bonds for recapitalization.
These particular bonds don’t bear curiosity and are issued at par to a financial institution, they mentioned, including that it will be an funding that will yield no return and as a substitute depreciate yr on yr.
This progressive mechanism was adopted to ease the monetary burden as the federal government has already spent Rs 22,086.54 crore on curiosity funds on PSB recapitalization bonds over the previous two years. monetary years.
In fiscal yr 2018-2019, the federal government paid Rs 5,800.55 crore as curiosity on these bonds issued to public sector banks to pump capital in order that they’ll meet regulatory requirements beneath the Basel-III pointers.
The next yr, based on the official doc, the curiosity cost by the federal government climbed thrice to Rs 16,285.99 crore to PSBs as a result of they held these papers.
For the present fiscal yr, the curiosity cost for recapitulation bonds has been lowered to Rs 19,292.77 crore from Rs 25,239.4 crore listed within the funds estimate.
Beneath this mechanism, the federal government points recapitalization bonds to a public sector financial institution in want of capital. Mentioned financial institution subscribes to the paper towards which the federal government receives the cash. Now, the cash obtained is invested within the financial institution’s personal funds.
The federal government subsequently has nothing to pay out of its personal pocket. Nevertheless, cash invested by banks in recapitalization bonds is classed as an funding that earns them curiosity.
In whole, the federal government has recapitalized round Rs 2.5 lakh crore over the previous three years. Within the first yr, the federal government issued recapitalization bonds of Rs 80,000 crore, adopted by Rs 1.06 lakh crore in 2018-2019. Within the final fiscal yr, the capital injection by means of bonds was Rs 65,443 crore.

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