Govt to recapitalise 4 banks; infuse Rs 14,500 crore

Govt to recapitalise 4 banks; infuse Rs 14,500 crore

The government has announced it will put in Rs 14,500 crore in Central Bank of India, Indian Overseas Bank, Bank of India and UCO Bank by issuing non-interest bearing bonds to the state-owned lenders.
Recapitalisation bonds will be issued with six different maturities, and the special securities would be “at par” for the amount as per the application made by the eligible banks.
The step completes the government’s capital infusion of Rs 20,000 crore in public sector banks for the current financial year. In December, it infused Rs 5,500 crore in Punjab and Sind Bank.

The special securities shall be non-interest bearing and no interest shall be payable on issue of the securities, said a notification dated March 30, marking a break from the usual practice of government issuing interest-bearing bonds to public sector banks.
Issuing bonds at par that can also be redeemed at par at the time of maturity is different from the approach taken in 2018 when interest was paid on these bonds and hence banks were able to gain income on these recap bonds which were invested in them.

As there is no interest cost for the government, this is a better alternative as against to the earlier one where interest was paid on recap bonds.
The interest cost for recapitalisation bonds issued by the government was Rs 16,286 crore in financial year 2019-20. This has been estimated at Rs 19,293 crore for the fiscal ending March 31.
To save interest burden on such bonds, the government last year decided to issue zero-coupon bonds for capital infusion of Rs 5,500 crore into Punjab and Sind Bank.

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