RBI speaks of its concern over zero-coupon bond for PSU bank recapitalization

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RBI speaks of its concern over zero-coupon bond for PSU bank recapitalization

The Reserve Bank of India (RBI) has recently shown its concern over the zero-coupon bond for the recapitalization of the banks under the public sector. Discussions are currently in progress between the central bank of India and the Finance Ministry to find out a feasible solution.

The government decided to resort to the recapitalization of the bonds with a coupon rate for capital infusion into PSBs during the years 2017-18 and interest payments to the banks for holding such bonds starting from the next financial year.

The first test that was conducted to check this new mechanism was an infusion of capital worth Rs 5,500 crore into Punjab & Sind Bank by issuing the said zero-coupon bonds which would mature at six different times last year. These special securities are given the tenure of 10-15 years and do not bear any interest and are valued at par.

According to sources, The Reserve Bank of India has recently raised its voice against the calculation of this effective capital infusion that is made in any bank with the help of this instrument. As these bonds are mostly non-interest-bearing but issued at a great discount to the face value, it becomes very difficult to ascertain the net present value, the source also added.

As the discount calculation can vary, which could further lead to accounting issues, both the Finance Ministry and The Reserve Bank of India are trying to find a solution to this issue.

This innovative mechanism is said to help ease the financial burden of the government as it has already spent about Rs 22,086.54 crore, in the last two years as interest payment towards the recapitalization bonds for certain public sector banks. Through this instrument, the government is supposed to issue the recapitalization bonds to any public sector bank that might be in need of capital. The said bank then subscribes to the paper. The government receives money against this. Following this, the money received goes to the bank as equity capital.

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