Money & Banking

Bank recap: Centre makes first move via bonds route

KR Srivats New Delhi | Updated on January 08, 2018

Shares of public sector banks rallied on Thursday after the Centre sought Parliament nod for additional spend of Rs 80,000 crore towards bank recapitalisation. Representative image

The Centre on Thursday sought parliamentary approval for an additional spend of ₹80,000 crore towards recapitalisation of public sector banks by issuing government securities.

The additional spend formed part of the third batch of Supplementary Demand of Grants for 2017-18.

This will not entail any cash outgo for the government because the additional spend will be matched by the additional receipts on issue of securities (recap bonds) to public sector banks, official sources said.

The additional spend is the first tranche of the ₹1.35-lakh crore bank recapitalisation bonds that are planned to be issued as part of the overall ₹2.11-lakh crore capital infusion plan for PSBs announced in October last year.

Deficit impact

Although there won’t be any cash outgo for the Centre on this account, there is still no clarity as to whether it would affect the fiscal deficit or not, say economists.

Aditi Nayar, Principal Economist, ICRA, told BusinessLine that this transaction would be cash-neutral, with inflow from issuance of securities being offset by capital infusion into public sector banks. “However, the impact on the fiscal deficit remains unclear, and would depend on whether the receipts generated by the issuance of securities are classified as debt or non-debt receipts,” she said.

Richa Gupta, Senior Economist, Deloitte in India, had a different take on the issue. She said that operationally, it appears that the present scheme will be much like the schemes adopted in the 1990s, where the bonds could add to the overall government debt.

“That said, the interest servicing is likely to increase government expenditure, but may not have a substantial impact on the overall fiscal deficit,” Gupta said.

“This will especially be so if the expense is counter-balanced by dividend payments as the PSBs recover,” she added.

“The critical factor here would be how soon the banks and the private investment sentiment respond to the stimulus,” Gupta said.

The move had a positive effect on shares of public sector banks.

Published on January 04, 2018

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