InvestorQ : Why is the RBI unhappy about banks being recapitalized with deep discount bonds?
Priyanka N made post

Why is the RBI unhappy about banks being recapitalized with deep discount bonds?

Neelam Naik answered.
2 years ago

The Reserve Bank of India has expressed major reservations over the issue of zero-coupon bonds or ZCBs by the government to PSU banks. Most of the PSU banks recapitalisation in the last couple of years has been done through issue of zero coupon deep discounted bonds. Such bonds are issued at a discounted and redeemed at maturity.

It may be recollected that back in 2015, the government had embarked on a massive recapitalization drive. Prior to that, the recap was through coupon bonds. However, post 2017, the government has largely relied on the issue of zero coupon bonds to recapitalize the banks, especially the ones that are stressed.

The RBI contention has been that with coupon bonds that are issued at par, there is a clear picture how much recap has been done. However, in the case of deep discount bonds, the NPV is considered and hence the actual picture of recap may be too hazy. Also, the RBI felt that the liability of banks may end up being bunched at maturity putting pressure.

The government resorted to ZCBs to reduce the fiscal pressure of the recap. The recap was done through special securities with tenure of 10-15 years. These are non-interest bearing and valued at par, instead of NPV so the picture of recap is actually very different. For the government, it saves nearly Rs.22,087 crore as interest on recap bonds and that is huge in a year when the fisc is already under tremendous pressure.