Business & Investment

RBI has expressed concern about zero-coupon bonds to recapitalize PSU Bank

New Delhi: Reserve Bank of India (RBI) Has expressed some concerns about zero-coupon bonds for capitalization of public sector banks (PSBs), and sources say between the central bank and the Treasury to find a solution. Discussions are taking place.

The government appealed to recapitalization bonds at a coupon rate for capital injection into PSB in 2017-18, and interest payments to banks to hold such bonds began in the next fiscal year.

The government has decided to issue zero coupon bonds to meet the capital needs of banks in order to ease interest rate burdens and ease financial pressure.

The first test case of the new mechanism was a capital injection of Rs 5,500 into Punjab & Sindh Bank last year by issuing zero coupon bonds with six different maturities. These special securities with a holding period of 10 to 15 years are interest-free and are valued at face value.

However, the RBI raised some issues regarding the calculation of effective capital injections made at banks through this product issued in Par, sources said.

These bonds are usually interest-free, but they add that it is difficult to determine their net present value because they are issued at a significant discount on their par value.

Both the Treasury and the RBI are discussing to resolve the issue, adding that discount calculations can fluctuate and can lead to accounting adjustments, sources said.

Since these special bonds are interest-free and are issued in the same way as banks, they are investments, no profits, and depreciate year by year.

Parliament approved Rs 20,000 in September 2020 to make it available for PSB recapitalization. Of this amount, Rs 5,500 will be issued to Punjab & Sind Bank, and the Treasury will request the remaining Rs 14,500 during the quarter.

This innovative mechanism helps ease the financial burden as the government has already spent Rs. 220.864 billion to pay interest on PSB’s capital-enhancing bonds in the last two fiscal years.

In 2018-19, the government paid 5,800.55 rupees as interest on bonds issued to public sector banks to invest capital in order to meet regulatory standards under the Basel III guidelines.

The following year, according to official documents, government interest payments tripled to reach Rs 16,285.99, as PSB holds these documents.

Under this mechanism, the government issues capital-enhancing bonds to public sector banks that require capital. The bank subscribes to documents for the government to receive money. The money received now goes as the bank’s equity capital.

Therefore, the government does not have to pay anything from the pocket. However, the money a bank invests in a capital-enhanced bond is classified as an interest-bearing investment.

Overall, the government has issued a capital increase of approximately Rs 2.5 in the last three fiscal years. In the first year, the government issued a recapitalization bond of Rs 80,000 and in 2018-19 it issued a recapitalization bond of Rs 1.06. During last fiscal year, fixed income capital injections were Rs 65,443.

RBI has expressed concern about zero-coupon bonds to recapitalize PSU Bank RBI has expressed concern about zero-coupon bonds to recapitalize PSU Bank

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