What is Recapitalisation Bonds (RCBs)?

Recapitalisation bonds are dedicated bonds to be issued at the behest of the government for recapitalizing the trouble hit Public Sector Banks (PSBs). Bonds worth of Rs 1.35 trillion is to be issued to inject capital into PSBs who are affected by high level of NPAs. Recapitalization bonds are proposed as a part of the Rs 2.11 trillion capital infusion package declared by the government on October 24th, 2017. In December 2018, the government announced the issue of additional Rs 41000 crores worth of recapitalisation bonds.

The term recapitalisation means giving equity money to cover debt of an entity. In the case of PSBs, their NPAs (debts) will be replaced by equity capital from recapitalisation by the government.

Money obtained from the sale of the bonds will be injected into the PSBs as government equity funding. Procedures for the issue of the bonds and the working mechanisms are yet to be decided by the government.

Who will issue the RCBs?

The final decision about the manner of bond issue is yet to be reached. Still, it is likely that RCBs will be issued by a holding company that is specifically created to hold government equities in PSBs. If such a company issues the bonds, the bond issue will not come under government debt and thus the debt will not add to fiscal deficit. Finance Minister Arun Jaitley has supported this idea.

“A holding company can be formed to which the government share in all PSBs will be transferred.” The FM revealed the government idea.

“The company will then issue the proposed bonds. This option may be used if the government doesn’t want to issue bonds directly.” – Jaitley added.

The bonds though may be issued by a separate entity, will have sovereign (government) guarantee.

How the Recapitalisation Bond issue will work?

The bond, once issued by the holding company, will be subscribed by public sector banks themselves. Fund from the issue of bonds will be used to subscribe shares of PSBs and will be treated as additional government equity or capital. In this way, capital of PSBs will be enhanced thereby helping them to tackle the present NPA problems.

Banks at present have adequate funds as the credit growth was low in the past few years. Additionally, banks have funds from the demonetization period deposits. At least 1 trillion rupees is supposed to be with the banking system where the depositors have to give explanation for the source of income.

How recapitalisation will help banks to tackle the NPA problem?

The PSBs will get additional capital from the government from the issue of the bonds. The amount of capital (money) to be obtained by each PSB will be determined later and it depends upon the depth of their NPA problem. Now, banks once obtained funds, can write-off the bad assets (loans) by using the fund from recapitalisation.

As per the Basel III norms, there should be a minimum higher quality capital like equity capital (Tier I capital). The Minimum Tier I capital as per the norm is 7%. Several PSBs doesn’t have this minimum higher quality capital. Besides, the Basel III in India requires banks to have capital conservation of buffer of 2.5%, which has to be realised by 2020.

The government is aiming to recapitalise troubled PSBs that are restricted to give loans after falling under the RBI’s Prompt Correct Action (PCA) Framework. In December 2018, the government announced additional Rs 41000 crores recapitalisation bond issue to bring banks out of the PCA.

What will be the impact of Recapitalisation Bonds on government’s fiscal deficit?

The funds mobilized from the sale of the bonds will not come as part of the fiscal deficit. but the interest payment for it will be a part of the fiscal deficit. According to the estimate of Chief Economic Advisor, the annual interest payments expense will come at around Rs 9000 crores. This interest payments expense will be covered from the profits of capital receiving PSBs.

Progress of recapitalisation bonds issue

The government has mobilised Rs 70000 crores through the issue of re capitalisation bonds in 2017 according to government sources. Remaining RS 65000 crores was expected to be made in 2018. But the government has modified its target for 2018-19. As per the new plan, the government plans to mobilise Rs 1.06 lakh crores (instead of Rs 65000 crores) through recapitalisation bonds after the additional amount of Rs 41000 crores declared in December 2018.

Additional issue of recapitalisation bonds worth Rs 41000 crores declared in December 2018

The additional recapitalisation bond-based fund infusion is expected to support banks in four dimensions:

  • Banks that need to meet minimum regulatory capital norms as per Basel III norms will get funds.
  • Better performing banks under Prompt Corrective Action (PCA) will be given capital to meet 9 percent CRAR norm and 6 percent Net NPA requirement to help them come out of PCA.
  • Fund will also help Non-PCA banks which are close to red line to ensure they don’t fall into PCA.
  • Funds will also help banks to avail regulatory capital for undergoing amalgamation.

As per the Basel III regulation followed in India, banks have to get capital conservation buffer (additional) of 2.5% by March 2020 and recapitalization is the viable option to meet the funds.

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