Weak public sector lenders such as the Central Bank of India and Punjab & Sind Bank would receive the lion’s share of the Rs 15,000 crore set aside for capital infusion in state-owned banks this fiscal year. This will assist these public sector banks (PSBs) in meeting their regulatory obligations.
According to sources, the Rs 15,000 crore capital infusion will primarily go to banks that received funds through non-interest-bearing bonds the previous year, as the RBI had expressed reservations about the appropriate valuation of these instruments.
The net present value of the infusion made last year through zero-coupon bonds, according to the RBI, is substantially lower than face value because they were issued at a discount, according to the sources.
These non-interest-bearing special securities have a term of 10-15 years and are valued at par. These bonds are often non-interest bearing and sold at a significant discount to their face value. As a result, banks’ effective Tier 1 capital levels may be lower than the regulatory requirement.
According to India Ratings and Research, a realistic valuation of the equity injected by the Government of India (GoI) in five PSBs last year through zero-coupon bonds might reduce the banks’ effective Tier 1 capital levels by 50-175 basis points, compared to reported levels. Punjab & Sind Bank received board clearance earlier this month to raise Rs 4,600 crore in equity capital by offering preference shares to the government.
This would allow the bank to increase its capital to the required level and avoid being placed under the PCA framework. According to reports, a decision on the quantity for additional banks will be made in March, and cash will then be pumped.
Given that zero-coupon bonds do not pay interest, their net worth might be about 50% lower from the outset than similar term government papers in the market, according to India Ratings, which added that the illiquid, non-trading nature of these instruments could add to the discount.
These banks are moderately competitive in raising equity (though better than last year) and would need to provide significantly higher returns to obtain Additional Tier 1 (AT1) capital from the markets. It claimed that valuing these zero-interest bonds at a reasonable level could compel these banks to raise equity or AT1 soon merely because of this aspect.
The government cut the capital injection objective in the Budget 2022-23 from Rs 20,000 crore to Rs 15,000 crore, down from Rs 20,000 crore previously projected for 2021-22.
Punjab & Sind Bank received the first capital infusion through non-interest-bearing bonds in the third quarter of 2020-21. In March 2021, Rs 14,500 crore was invested in four lenders: Bank of India, Indian Overseas Bank, Central Bank of India, and UCO Bank.
The Central Bank of India received Rs 4,800 crore, the UCO Bank received Rs 2,600 crore, the Bank of India received Rs 3,000 crore, and the Indian Overseas Bank received Rs 4,100 crore.
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