First tranche of bank recap bonds likely in December

The government may issue the first tranche of ~1.35 lakh crore worth of bank recapitalisation bonds in the first week of December.

“The issue of bonds is likely to start in early December. They will carry a coupon of around 7 per cent and the first tranche may have tenure of 10 years. Different tranches could have different maturity periods,” said an official aware of the deliberations.

The Centre is in the final stages of discussions with banks and the Reserve Bank of India (RBI) regarding the issue of these bonds. The amount of the first tranche has not yet been decided.

Finance ministry officials have said these bonds, part of a two-year ~2.11lakh crore programme to recapitalise public sector banks, will be front loaded over the next three or four quarters. The official said no decision had been taken on the banks to which the money raised would be directed.

The Union Cabinet had last month cleared the bank recapitalisation programme, involving ~1.35 lakh crore in recapitalisation bonds, ~18,000-crore budgetary allocation in 2017-18 and 2018-19, and ~58,000 crore raised from the market by the banks themselves.

The weaker public sector banks are likely to be provided capital to cover their provisioning requirements and stronger banks money for growth. The allocation will depend on how banks have dealt with non-performing assets, their progress in cases referred for insolvency proceedings and their effectiveness in provisioning among other issues.

Financial Services Secretary Rajiv Kumar said on Sunday that bank recapitalisation would be preceded and followed by a number of reforms.

Sources said before the recapitalisation began, public sector banks may be required to clean up their books by writing off a small portion of NPAs apart from money locked up in cases referred to the National Companies Law Tribunal under the Insolvency and Bankruptcy Code.

The government is looking at the ~20,000 crore bank recapitalisation bonds issued in the mid-1990s as a prototype for the upcoming issues. The bonds will not affect the fiscal deficit, apart from the yearly interest payment. The earlier bonds were deemed heldto-maturity and then allowed to be traded in the secondary markets from 2007.

Chief Economic Advisor Arvind Subramanian has said the interest burden on the Centre on account of the recapitalisation bonds will be around ~8,000-9,000 crore and that this is unlikely to have an inflationary impact.

Subramanian said whether the bonds added to the fiscal deficit would depend on the accounting employed. Under standard international accounting, such bonds do not increase the deficit as they are below-the-line financing. By Indian accounting conventions, these bonds would add to the deficit, he had said.