The Centre has resorted to a novel recapitalisation exercise to provide ₹5,500-crore support to state-owned listed Punjab & Sind Bank to shore up its regulatory capital and help enhance exposure limits, thereby improving the lending capacity of the bank.

This support will now facilitate the bank to use this capital to expand its banking activities for agriculture, rural and MSME sectors, with its prominent presence in Punjab, Haryana and Delhi, which account for nearly 900 out of its 1,500 branches.

The significant aspect is that the capital support will be achieved without the government really infusing funds (no cash outgo) in the bank.

While on the one side, the government will subscribe to equities worth ₹5,500 crore to be issued by the bank on a preferential allotment basis (PSB Board approved this on November 21), the bank has been asked to subscribe to ‘non-interest bearing’ and ‘non-transferable’ Special GoI securities maturing from 2030-35 and with aggregate maturity amount being ₹5,500 crore. These securities have since been issued in the name of Punjab & Sind Bank.

It is a rarest of the rare situation when the government recapitalisation exercise has been done through securities not yielding any interest for the subscriber entity or institution, said banking industry observers. Put simply, Punjab & Sind Bank will not earn interest income during the tenure of these non-interest bearing special securities, which banking industry observers loosely term as ‘zero coupon bonds’.

‘Held to Maturity’ portfolio

The Finance Ministry, which has notified the issuance of the special securities, has allowed Punjab & Sind Bank to account for these securities under ‘Held to Maturity’ portfolio without any limit. Also, such investments will not qualify as Statutory Liquidity Ratio eligible papers.

When contacted Charan Singh, Chairman of Punjab & Sind Bank, told BusinessLine that this support by the government will strengthen the bank’s balance-sheet. Ashok Haldia, former Managing Director of PTC India Financial Services (PFS), said this (government move) is an unusual measure for strengthening the capital base of otherwise capital starved public sector banks without really infusing funds and is best avoided.

“However, given the enormity of the problem, it can still be justified if the banks leverage the capital so infused, albeit artificially, prudently by ensuring quality in lending — lest these find themselves in a more precarious situation in future,” Haldia said.

Amarjit Chopra, a former President of the CA Institute, said this government support will help Punjab & Sind Bank improve its capital adequacy, but when it comes to assessing performance of the bank on return on assets, it will be seen in poor light as no interest income is coming the way of the bank.

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