CEA pegs interest cost of recapitalisation bonds at Rs 9,000cr

Recapitalisation bonds are likely to impose an interest burden of about Rs 9,000 crore annually on the government, though they will not have any inflationary implications for the economy, Chief Economic Adviser Arvind Subramanian said today.

Yesterday, Finance Minister Arun Jaitley unveiled an unprecedented Rs 2.11 lakh crore two-year road map to bolster NPA-hit public sector banks, which includes Rs 1.35 lakh crore re-capitalisation bonds, budgetary support, and equity dilution.

The stressed assets in the banking sector has reached Rs 10 lakh crore, Subramanian said, adding bonds would help bring down bad loans in the banks and strengthen their balance sheet and prop up credit growth.

"First, the true fiscal cost of issuing the Rs 1.35 lakh crore recapitalisation bonds is the interest payment of about Rs 8,000-9,000 crore. But cost can be offset by the confidence impact of addressing the critical economic bottleneck, thereby increasing credit supply, private investment and growth," he said.

He illustrated the point, saying that under standard international and IMF accounting, recap bonds do not increase deficit and they are "below-the-line" financing.

"But under India s convention, these bonds would add to deficit," he added.

These bonds after taking into account the existing provisioning and the recoverable value of the underlying loans will ensure a healthy capital base for the public sector banks. The issuance of bonds will also be consistent with international norms and standards.

Such bonds were first introduced by the government in the 1990s to recapitalise PSU banks.

The recapitalisation programme entails mobilisation of capital, with maximum allocation in the current year through budgetary provisions of Rs 18,139 crore, and recapitalisation bonds to the tune of Rs 1.35 lakh crore over the next two years.

The balance will be raised by banks from the market by diluting government equity. The government's equity dilution will help banks raise about Rs 58,000 crore. The government equity, as per the current policy, can come down to 52 per cent in state-owned banks.

Stating that issuance of bonds is unlikely to change financial position of the government, Subramanian said, "IMF convention is economically more intuitive because bonds are a capital transaction, their issuance does not increase directly demand for goods and services and has no inflationary consequence".

It is a capital transaction because on the one hand, it increases the government s liability but it also increases its assets, he added.

He also said, "the details of the mechanics of issuing these recap bonds will be elaborated in the period ahead (will they be marketable, will they count toward SLRs (statutory liquidity ratio), what will be the coupon etc etc)." It is likely that the recap bonds will be placed with the banks for which the government will get an equivalent holding of equity in the banks, he said.

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