Nominal coupon on recap bonds likely before Mar-end
PremiumMove aims to avoid the burden of a mark-down in Mar quarter after RBI expressed concerns
MUMBAI : The central government is likely to revert to a nominal coupon rate on recapitalization bonds for public sector banks to avoid the burden of a mark-down in the fourth quarter after the Reserve Bank of India (RBI) expressed concerns, said two bankers, requesting anonymity.
During its annual inspection, RBI had said zero-coupon bonds should be valued at the net present value and not at face value, according to the Indian accounting standard, hence attracting higher capital. However, under existing accounting norms, the bonds are treated at face value.
“Some thinking is going on. That’s why the gazette notification on the capital infusion of Punjab and Sind Bank is delayed. It is likely to come out next week. Then it will be clear whether it will be interest-bearing and what will be the maturity," said one of the two bankers cited above.
The Centre had introduced zero-coupon recapitalization bonds in 2020 to help banks avoid cash outgo and delay the payment of interest. Zero-coupon bonds do not give interest and are issued at a deep discount to the face value making it difficult to ascertain the net present value.
The Centre had infused a total capital of ₹20,000 crore across five banks through such bonds. Central Bank of India received ₹4,800 crore, UCO Bank ₹2,600 crore, Bank of India ₹3,000 crore, Indian Overseas Bank ₹4,100 crore and Punjab & Sind Bank ₹5,500 crore in the second half of fiscal year 2021.
After this year’s inspection, RBI asked Punjab & Sind Bank to mark down the bonds according to the net present value, which would have led to its capital adequacy breaching the threshold of 8%. However, the government stepped in last week to infuse an additional capital of ₹4,600 crore into the bank as part of its recapitalization plan of ₹15,000 crore for this year.
Bank of India has also been asked by RBI to mark down the recapitalization bonds. In a stock exchange notice last week, the bank said there was a divergence in capital assessment of ₹1,652 crore in this fiscal year due to the bonds. This would have a marginal impact on its tier-I capital adequacy, which stood at 13.16% at the end of December 2021.
“Government can take back these bonds and issue a coupon-bearing bond with nominal rate of interest, where the interest outgo is nominal. That said, most banks will be able to absorb the mark-down on the bonds as they have been making sufficient profits this year. Even if there is a write down, the impact on capital will be less than 1%," said the second banker, the head of a public sector bank.
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According to India Ratings and Research, the fair valuing of the bonds issued by the government in five public sector banks in H1FY21 could lower their effective tier-I capital levels to the range of 50-175 basis points. “In Ind-Ra’s estimates, while the impact on P&S Bank could be as high as 5% on CET1 at end-9MFY22, it could be manageable for most other banks that are carrying CET1 in the range of 12%-13%," it added. The government’s ₹15,000 crore capital infusion plan for FY22 is yet to be allocated. Mint reported on Tuesday that it is likely to infuse this capital in the second half of March.
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