Bank bonds on agenda

The central government is seriously considering bank capitalisation bonds, worth some Rs 30,000 crore to supplement its budgeted capital infusion in PSU banks for this fiscal.

By Jayanta Roy Chowdhury
  • Published 17.10.17
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New Delhi: The central government is seriously considering bank capitalisation bonds, worth some Rs 30,000 crore to supplement its budgeted capital infusion in PSU banks for this fiscal.

Officials said this would be the second time in some 32 years for India to come up with such recapitalisation bonds.

"Despite the current NPA problem, Indian banks have a reputation for stolid, professional management which weathered the 2008 global banking crisis very well. With Indian sovereign guarantee, the bonds should have a lot of takers," said officials.

The proposal has found favour with the North Block and may be taken up along with a move to sell more stakes in PSU banks as also mergers to form large all-India banks. The government is committed to recapitalise state-run banks by Rs 10,000 crore during this fiscal through budgetary allocations.

The bond would supplement the budgetary infusion of capital and will target financial institutions including foreign lenders. "The whole idea is to make this bond an off-budget exercise," said officials. If the bonds are kept off-budget, they will not impact the government's fiscal deficit, which is under pressure on account of slow growth and question marks over indirect tax collections.

The gross bad loans of banks (public and private) have touched 9.7 per cent of advances at the end of March. In state-run banks, gross NPAs made up for as much as 11.7 per cent of their advances. State-run banks for the first time in two decades reported falling loans in 2016-2017 when advances fell to Rs 1.35 lakh crore from Rs 1.34 lakh crore in the previous year.

The capitalisation bonds will, however, be finalised after more rounds of meetings with the Reserve Bank who have certain issues which "have to be sorted out" said the officials. These bonds will be in addition to bonds which individual banks are floating and which are considered tier-II capital.

N.R. Bhanumurthy of the National Institute of Public Finance and Policy, a highly regarded finance ministry think tank, said "the government should consider providing financial support in recapitalising banks to the tune of Rs 30,000 crore, which would help in credit flow to private sector and enhance public sector spending" .

Loan dip

Bank lending fell because of absence of good assets and high NPAs, but analysts said part of the reason was inadequate capitalisation.

Analysts vary in their assessment of how much capital Indian banks need to meet Basel-III capital adequacy norms. Some put the figure at $14 billion but others say it is much higher at $65 billion.

RBI deputy Governor Viral Acharya had also pointed out to the dangers of delaying capitalisation .