How recap bonds can help revive PSU banks
, ET Bureau|
Updated: Oct 25, 2017, 09.22 AM IST
The Union Cabinet approved a Rs 2.11-lakh-crore recapitalisation plan for public sector banks. Of the corpus, recapitalisation bonds will account for Rs 1.35 lakh crore, while Rs 76,000 crore will be available through budgetary support and equity issuance.
1. How will the bonds work?
The government gives money to banks, which credit the sum on their balance sheet. On the same day , the government issues bonds of simi lar quantum, and those banks subscribe the instruments directly. Therefore, it is more of an accounting entry with sovereign money not moving out.
2. Why so?
Such move saves the government from releasing extra funds as it is running a deficit budget.
3. How will banks benefit from this?
The move shores up their capital base indirectly. These bonds are of two kinds: Lenders could either sell them in the secondary market or hold them until maturity . If the government allows them to sell in the secondary market, banks can sell them to realise money , which can be used in expanding their loan book.
In case banks are not allowed to sell, they can use them as investments, earning half-yearly interest income. This will release fund availability as banks will be free from making other routine investments. Such money too can help banks extend good-quality loans.
These bonds are likely to have non-SLR status. Statutory Liquidity Ratio, or the portion of deposits that banks are mandated to keep in government bonds, is now at 19.5 per cent.
4. Is it happening for the first time?
No. It has precedents. Market participants say that the government had infused as much as `20,000 crore into state-owned banks between 1985 and 1995. After the introduction of banking sector reforms in 1992, an amount of `17,746 crore was infused as re-capitalisation support to nationalised banks until March 31, 2002.
5. Will such re-capitisation add to the government's fiscal deficit?
Normally, the government does not include it in its fiscal deficit.
This could well be a conflict point with the rating companies that give sovereign grades. Going by the past experience, rating companies insist on factoring such moves in assessing a country's fiscal deficit, a key trigger for rating revision.
6. Does it mean a downgrade?
No, but a rating upgrade does not look imminent.
1. How will the bonds work?
The government gives money to banks, which credit the sum on their balance sheet. On the same day , the government issues bonds of simi lar quantum, and those banks subscribe the instruments directly. Therefore, it is more of an accounting entry with sovereign money not moving out.
2. Why so?
Such move saves the government from releasing extra funds as it is running a deficit budget.
3. How will banks benefit from this?
The move shores up their capital base indirectly. These bonds are of two kinds: Lenders could either sell them in the secondary market or hold them until maturity . If the government allows them to sell in the secondary market, banks can sell them to realise money , which can be used in expanding their loan book.
In case banks are not allowed to sell, they can use them as investments, earning half-yearly interest income. This will release fund availability as banks will be free from making other routine investments. Such money too can help banks extend good-quality loans.
These bonds are likely to have non-SLR status. Statutory Liquidity Ratio, or the portion of deposits that banks are mandated to keep in government bonds, is now at 19.5 per cent.
4. Is it happening for the first time?
No. It has precedents. Market participants say that the government had infused as much as `20,000 crore into state-owned banks between 1985 and 1995. After the introduction of banking sector reforms in 1992, an amount of `17,746 crore was infused as re-capitalisation support to nationalised banks until March 31, 2002.
5. Will such re-capitisation add to the government's fiscal deficit?
Normally, the government does not include it in its fiscal deficit.
This could well be a conflict point with the rating companies that give sovereign grades. Going by the past experience, rating companies insist on factoring such moves in assessing a country's fiscal deficit, a key trigger for rating revision.
6. Does it mean a downgrade?
No, but a rating upgrade does not look imminent.
