An Indian two thousand rupee banknote is arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Recap Bonds May Follow The 1993 Script

Recapitalisation bonds that will be used to inject funds in public sector banks may be similar to those issued in the 1990s to increase the capital base of the state-owned lenders, a government official told BloombergQuint requesting anonymity.

The economy was on the mend after the government unveiled the reforms after the 1991 balance of payments crisis. It forced banks to recognise bad loans and then Finance Minister Manmohan Singh set aside Rs 5,700 crore for recapitalisation through bonds in the Budget for 1993-1994.

The government issued recap bonds with a coupon rate at 10 percent in 1993-95, the prevailing market rate. The bonds were tradeable and were not part of Statutory Liquidity Ratio. In 2002, the government revised the fixed coupon rate and extended the tenure of these bonds.

The latest recapitalisation bonds are unlikely to have a zero coupon rate and will also be linked to the market rate, another senior government official said. They may not get the SLR status, the official said. SLR is the percentage of deposits the banks have to maintain in government securities. The current rate is 19.5 percent.

The bonds will initially be held to maturity and may be made tradeable later, the official quoted above said.

Banks would get the funds before government’s equity dilution as they would not be able to raise Rs 58,000 crore from the market unless adequately capitalised, the official said. Of the 2.11 lakh crore that the government plans to inject, Rs 58,000 crore would be borrowed from the market and Rs 18,000 crore would be budgetary support over two years.

Also Read: The Mega Bank Recap: The Best Of Bad Options

Write Off Debt Before Recap Plan?

The official quoted above said that banks should anticipate recoveries from bad loans undergoing the resolution process at National Company Law Tribunal, and write off what can’t be recouped before the government infuses capital. Weak or unviable banks are unlikely to be given capital for growth, and may be recapitalised only to provide for bad loans, he said.

Chief Economic Adviser Arvind Subramanian had on Wednesday batted for cleaning up banks’ balance sheets before recapitalisation. He also said there was a need to shrink the number of unviable banks, and need to create five to seven large public and private sector banks.

The government will also have to seek Parliament's approval to issue these bonds, another government official told BloombergQuint.

Also Read: Three Factors To Consider Before Bank Recapitalisation

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