The government is likely to issue bonds under bank recapitalisation plan in January next year, reported ET Now. Bonds worth Rs 70,000 crore may be issued by the government in the first tranche. The modalities of these recap bonds, which will be front-loaded, are likely to be finalised in 15-20 days, the report added. According to a CNBC TV18 report on Monday, it is not necessary that all PSBs will be issued recap bonds in the first tranche and the capital infusion through bonds is contingent on the banks’ performance. The government bifurcated the entire Rs 2.11 lakh crore amount for bank recapitalisation in two parts: First, through budgetary allocation and second, by issuing recapitalisation bonds. The government plans to infuse Rs 76,000 lakh crore capital by giving it space in budgetary allocation and through markets, and rest 1.35 lakh crore by issuing recapitalisation bonds.
What is bank recapitalisation?
Bank recapitalisation, as the name suggests, means recapitalising banks with new capital to improve their balance sheet. The government, using different instruments, infuses capital into banks undergoing credit crunch. Capital is the money invested by shareholders in the business. Since the government is the biggest shareholder in public sector banks, the responsibility of infusing capital majorly lies with the government.The recapitalisation plan comes into action when banks get caught in a situation where their liabilities are comparatively higher than their assets. The liquidity with banks is a liability as it is the money deposited by customers, which needs to be paid sooner or later. Due to this their balance-sheet weakens and banks find it difficult to raise capital from the open market. The government, which is also the biggest shareholder, can infuse capital in banks by either buying new shares or by issuing bonds.
What are recapitalisation bonds?
A government bond is an instrument to raise money from the market with a promise to pay to repay the face value of the maturity date and a periodic interest. A bond issued for the purpose of recapitalisation is called recapitalisation bonds.
How do recapitalisation bonds work?
The government will issue recapitalisation bonds, which banks will subscribe and enter it as an investment in their books. The banks will lend money to the government for subscribing the bonds. This money raised by the government through these bonds will go back to banks as capital. This will immediately strengthen the balance-sheet of the banks and show capital-adequacy. Since the government is always solvent, the money lent to the government for subscribing recap bonds is free from becoming a bad loan.