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Public sector banks agree to govt terms for Rs 800-billion recap bonds

Somesh Jha/New Delhi 14 Mar 18 | 12:28 AM

Illustration by Ajay Mahanty

All the 20 public sector banks (PSBs) have obtained approval from their respective boards for the terms and conditions put forth by the Union government to receive capital infusion through bonds as part of the recapitalisation plan.

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Boards of PSBs were required to approve the EASE (Enhanced Access and Service Excellence) plan, chalked out by the Centre, to implement the reforms agenda for “responsive and responsible PSBs". The process was mandatory for PSBs to get recapitalisation funds from the government, which is to infuse Rs 800 billion in the current financial year.

“We have received communication from all banks that their boards have approved the EASE plan. We are sending a proposal to the Department of Economic Affairs (DEA), seeking its approval on issuing the recapitalisation bonds," a government official said. The approval from the DEA might take one week, the official added, following which the bonds would be issued. The government will additionally infuse Rs 81 billion into banks from its own finances.

The government has set strict terms, under the EASE plan, for issuing the recapitalisation bonds. The terms require PSBs to create a stressed asset management vertical, tie up with agencies for specialised monitoring of loans above Rs 2.5 billion, conduct strict surveillance of big loan defaulters, and appoint a whole-time director for monitoring reforms every quarter,  among other steps.

“We will provide funds under the recapitalisation bonds as committed in January," said another official. However, the government will not increase the recapitalisation funds for Punjab National Bank (PNB), which has reported a Rs 129 billion scam through fraudulent letters of undertakings, the official added. PNB is set to receive Rs 54.7 billion this financial year.

The Rs 800-billion recapitalisation bonds will have a tenure of 10-15 years and would carry a coupon rate in the range of 7.35-7.68 per cent. Termed “non-transferable special government of India security", the bond will carry an interest rate, also known as the coupon rate, of 7.35 per cent for bonds maturing in 2028, 7.42 per cent for 2029, 7.48 per cent for 2030, 7.55 per cent for 2031, 7.61 per cent for 2032, and 7.68 per cent for 2033.

State Bank of India will get the highest infusion, Rs 88 billion, through the recapitalisation bonds, followed by IDBI Bank (Rs 78.8 billion) and Bank of India (Rs 69.7 billion). Eleven banks facing prompt corrective action by the Reserve Bank of India will receive Rs 523 billion this financial year, while comparatively healthy banks will receive Rs 358 billion.

The recapitalisation plan of Rs 2.11 trillion, announced last year by the government, will be done in phases. Apart from the Rs 800 billion in bonds, the balance Rs 1.35 trillion will be mobilised through budgetary support and market borrowing.

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