The government is closely looking at a “liquidity neutral” model of recapitalisation whereby public-sector banks (PSBs) sell their shares to the government, which, in turn, issues bonds to the banks, a senior finance ministry official told FE. While the trading of such possibly long-duration bonds may not be allowed initially to prevent any wide-scale disruption in the bond market, the banks will likely be permitted to sell these later and realise proceeds. “The broad contours are yet to be finalised, but we are certainly looking at these options, among others. The potential impact of any such move on fiscal deficit will be a key factor while finalising the various aspects of the bond issue,” said the official.
The government had issued similar bonds in the 1990s, which became marketable in 2006-07. Some analysts said the government may set up a special purpose vehicle to issue these bonds. The government is also considering giving priority to recapitalisation over consolidation of PSBs and stake dilution. “Consolidation will happen and the government is serious about it. But at this stage, the government doesn’t want to impress upon the boards (of the banks) and sort of force a bad marriage in a rush just for the sake of consolidation.
The immediate priority is recapitalisation, and consolidation and stake dilution will follow,” he said. The idea is that with massive capital infusion and consequent balance sheet clean-up, a more pragmatic and informed decision can be made about consolidation by the respective boards of the PSBs, said the official. Also, the valuation of the PSBs will rise following the clean-up, as private investors will be more interested in them, and a stake dilution at that point will yield more, he added.
So while the government’s stake in the PSBs will go up immediately after the bonds are issued to them, ultimately the recapitalisation will pave the way for easier dilution of the centre’s shareholding in them with potentially greater participation of private investors.
The government is also weighing both zero-coupon bond–which is issued at a deep discount to its face value but offers no interest–along with the ones with a coupon rate. “Nothing is ruled out at this stage. A final decision will be announced in a week or two,” said another government official. The infusion will improve the state-run banks’ capital adequacy, or their capital to risk-weighted assets and liabilities, and enable them to lend more.
According to an SBI Ecowrap report, the government may look into the Nayak committee recommendations according to which the centre may set up a Bank Investment Company to hold equity stakes in banks which are currently held by the government.
“If these bonds remain non-tradable initially, there won’t be much impact on the bond market. But if banks are allowed to dump these securities right from the beginning, with the kind of size that the government has announced (Rs 1.35 lakh crore over two years, much of which will be front-loaded), the move has potential to drive up yields and cause disruption in the bond market,” Karthik Srinivasan, group head (Financial Sector Ratings) at ICRA, said.
Kotak Institutional Equities said in a report that in the near term, even though the market supply may not increase, yields may see upside pressure, especially in strained liquidity scenarios. “We reiterate our view that yields will remain on a negative bias with the 10-year benchmark yield at 6.50-6.80%, with upward bias.”
It added the bonds will add around 80 basis points to the government’s debt to GDP ratio in the current fiscal.
Refuting notions that the bonds will potentially alter the government’s fiscal math drastically, the SBI report said between 1986 and 2001, interest paid by the government to the nationalised banks on recapitalisation bonds worked out to an average of 0.07% of GDP a year, while the banks’s average dividend payments to the government was 0.06% of GDP during this period. “So, the net impact was only 0.03% of GDP on fiscal deficit, almost nil,” it said.
Sources had earlier said only the interest burden of such a move, roughly around Rs 8,000-9,000 crore a year, would be accounted for in the Budget, while the total bond amount would be the government’s off-Budget liabilities.