The government is looking at different methods to issue Rs 1.35 lakh crore recap bonds. One option the government is actively considering is setting up of a holding company in which its bank shares would be vested. Zero coupon bond is also being deliberated upon as the government is exploring the most effective means for capital infusion in public sector banks (PSBs), a senior finance ministry official said.

The idea behind examining various options is that recapitalisation could proceed without the government taking any hit on its books or adding to bad loans or fiscal deficit.

The advantage of setting up a holding company is that the new entity can issue recap bonds to banks, saving the government from issuing bonds directly and taking the interest burden.

The nature of bonds — if it will be an SLR-linked or not — is still under discussion, said sources, adding that modalities of how to go about it are also being debated.

The recap bonds, if issued by a holding company, will have the sovereign guarantee from the government and the interest cost can be managed through bank dividends towards this entity, a source said. The holding company can also be used to sell shares of state-run banks, the source further said. The government already has recommendations of PJ Nayak Committee, which suggested government vesting its bank shares in a holding company.

The government on Tuesday unveiled a massive ‘stimulus’ for public sector banks with a Rs 2.11 lakh crore recapitalisation plan aimed at cleaning up their accounts and help them revive investment in a trailing economy by supporting credit growth and job creation. Of the Rs 2.11 lakh crore, recapitalisation bonds will account for Rs 1.35 lakh crore and another Rs 76,000 crore will come from budgetary support and share issuance.

The government is keen that banks raise funds from the market. It also wants to trim its stake in them to 52 per cent.

Another view emerging within the ministry is that since the size of bond issue is high, the government should issue them itself for prompt corrective action to settle bad loans.

If the government issues bonds itself there is an interest outgo of Rs 9,000 crore per annum, as per the calculations of chief economic adviser Arvind Subramanian, which he says can be offset by growth multiplier effect. There will be an increase to the debt, he said, as per Indian economic accounting standards.

Sources said one side effect of government issuing bonds directly, besides the interest outgo, is on its books. The entire exercise becomes a pure government affair without putting in place a mechanism to handle the issues on an institutional basis, which the government wants to avoid, sources added.

Sources cited the example of Insolvency and Bankruptcy Code (IBC), which was framed and a proper mechanism was developed to handle bad loans resolution. Similarly, the government wants to set up a roadmap for handling fund infusion in banks through a mechanism without getting itself involved in the nitty-gritty. The present government had a bank investment committee plan of 2014, which may be revived with tweaks to accommodate the current developments.

The zero coupon bonds, which are also part of the discussion, would not entail any interest outgo and there is just one-time payment, including interest income to bond holders.

Sources said there are a host of other banking reforms waiting which have to be carried out. The government is the policymaker and the actual action needs to be carried out under a framework.