Reserve Bank of India governor Urjit Patel has welcomed the government’s decision to infuse capital in public sector banks through recap bonds and said such a move is liquidity neutral for the government.
“Recapitalisation bonds will be liquidity neutral for the government except for the interest expense that will contribute to the annual fiscal deficit numbers,” Mr. Patel said in a statement.
The government on Tuesday decided to infuse ₹2.11 lakh crore capital in public sector banks over two years by a combination of recap bonds and through budget provision.
“The proposed recapitalisation package for the banking sector combines several desirable features. First, by deploying recapitalisation bonds, it will front-load capital injections while staggering the attendant fiscal implications over a period of time,” he said.
He said it will allow for a calibrated approach whereby banks that have better addressed their balance-sheet issues and are in a position to use fresh capital injection for immediate credit creation can be given priority while others shape up to be in a similar position. Such a move provides for a good way of bringing some market discipline into a public recapitalisation program compared to the past recapitalisation programs, Mr. Patel added.