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BusinessFinance Ministry evaluating PSB recapitalisation avenues

Finance Ministry evaluating PSB recapitalisation avenues

Published: 16th Jan 2021 7:16 pm

New Delhi: With the RBI raising concern over the issuance of zero coupon bonds for recapitalisation of public sector banks (PSBs), the Finance Ministry is examining other avenues for affordable capital infusion including setting up of a Bank Investment Company (BIC), sources said.

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Setting up a BIC as a holding company or a core investment company was suggested by the P J Nayak Committee in its report on ‘Governance of Boards of Banks in India’. The report recommended transferring shares of the government in the banks to the BIC which would become the parent holding company of all these banks, as a result of this, all the PSBs would become ‘limited’ banks. BIC will be autonomous and it will have the power to appoint the board of directors and make other policy decisions about subsidiaries.

The idea of BIC, which will serve as a super holding company, was also discussed at the first Gyan Sangam bankers’ retreat organised in 2014, sources said, adding it was proposed that the holding company would look into the capital needs of banks and arrange funds for them without government support.

It would also look at alternative ways of raising capital such as the sale of non-voting shares in a bid to garner affordable capital. With this in place, the dependence of PSBs on government support would also come down and ease fiscal pressure.

To save interest burden and ease the fiscal pressure, the government decided to issue zero-coupon bonds for meeting the capital needs of the banks. The first test case of the new mechanism was a capital infusion of Rs 5,500 crore into Punjab & Sind Bank by issuing zero-coupon bonds of six different maturities last year. These special securities with tenure of 10-15 years are non-interest bearing and valued at par.

However, the Reserve Bank of India (RBI) expressed concerns over zero-coupon bonds for the recapitalisation of PSBs. The RBI has raised some issues with regard to calculation of an effective capital infusion made in any bank through this instrument issued at par, the sources said.

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