The bond issuances will be front-loaded which means a large part will be issued over the next four quarters with the remaining being scheduled after that. (Reuters)
Despite the government announcing its recapitalisation plan that includes issuance of recap bonds worth Rs 1.35 lakh crore, bond market experts believe the step is unlikely to significantly dent the bond yields in the short run. Granular details on these bonds are still awaited. It is understood that banks will subscribe to these bonds and hold it on their books as their investment. The funds which will go to the government will be reinvested as equity in the same banks. The banks will continue to get the coupon payments if they continue to hold the bonds on their books. Ananth Narayan, a money market expert points out that the best way to manage recapitalisation is via recap bonds as it makes it cash neutral. “While it may sound like an accounting entry, the reality is it is much more than that,” Narayan points out.
The bond issuances will be front-loaded which means a large part will be issued over the next four quarters with the remaining being scheduled after that. Market experts indicate bond yields will only shoot up if banks start to monetise these bonds when they move towards a liquidity deficit situation.“There is no real outflow happening anywhere. Money is going from banks to buy the bonds from the government. But the same money comes back as equity. There might be nervousness because there are extra bonds in the system. Eventually as we go to a liquidity deficit situation, let’s say six months down the line, at that point in time banks might look to monetise some of these bonds. That might cause some extra supply problems,” Narayan points out.
He added other countries like Indonesia, Malaysia and Thailand have issued recap bonds during the Asian crisis. “They are still outstanding. They stay in the balancesheet of the banks and don’t come into the system. They do not change the demand supply dynamics,” he said. The bigger question here is whether these bonds will add to the fiscal deficit. As finance minister Arun Jaitley stated in the press conference it will depend on the nature of the bond itself. “This also will depend on the manner in which they are dealt with. Globally, they are dealt with in a manner that they don’t become a part of the fiscal deficit. So a lot of international agencies don’t put it as a fiscal deficit. Domestically, we have a different standard within India. But this will also depend on who is issuing the bond and what is the nature of the bond. But in any case, if the bonds are intended to be issued for a purpose of strengthening the banking system itself, it will go in the larger interest of the economy,” Jaitley pointed out.
Arvind Subramanian, chief economic advisor pointed out that although under the International Monetary Fund accounting practice, recapitalisation is treated below the line, which means it is not part of the deficit; under Indian accounting practices recapitalisation is above the line and is part of the deficit. He further explained that the reason why recapitalisation is generally considered below the line as per international practices is because it doesn’t directly add to the demand for goods and services which is what the deficit measures. “So in that sense it is not going to be inflationary, etc,” he said. Usha Thorat, ex-deputy governor at the Reserve Bank of India pointed out that the recap bonds will help the banks to get a better value when they raise capital. “Obviously, that is the whole design of this. When these banks go to raise capital in the market, it will get it at a better rate,” she said.
SBI chairman Rajnish Kumar said: “This milestone announcement on recapitalizing banks in one-go is a bold and courageous move and was indeed the need of the hour. It will generate balance in overall demand and supply by bringing more investments in sectors like infrastructure. These funds will also help in efficiently managing risk and credit capital related requirements of the banks.” The steps will also encourage private participation thus boosting growth going forward. The thrust to infrastructure will generate direct and indirect positive cascading effects for lot of related sectors and will create feel good factor for all stakeholders.”
