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The government of India’s (GoI) proposed equity infusion in four public sector banks (PSBs) through non-interest-bearing bonds would bolster their regulatory capital levels, but their lower intrinsic values would not strengthen their tangible equity by as much, says India Ratings and Research (Ind-Ra).

The agency understands that these long-tenor securities would be factored at par value rather than the discounted value in the banks’ balance sheet.

These banks have weak tangible buffers or a weaker ability to build and maintain capital buffers. Ind-Ra believes the intrinsic net worth of these instruments could be lower by more than 50% at the outset than similar maturity government papers in the market. The illiquid, non-trading nature of these securities could add to the discount.

The GoI has notified to infuse capital in Central Bank of India,  UCO Bank, Bank of India and Indian Overseas Bank. The first such infusion was in Punjab and Sindh Bank (P&SB) in 3QFY21. The proposed quantum of capital infusion varies between 11%-44% of the Tier I capital of the respective PSBs as of 3QFY21.

Equity levels is an important factor in the banks’ ability to service Basel III Additional Tier 1 and Tier 2 bonds. While the quantum of these instruments is limited in the total equity profile of most of these PSBs, the notching down for their Tier II bonds and additional Tier I bonds from the long-term issuer ratings and the standalone rating, respectively, could widen.

The GoI has already allocated Rs 200 billion for equity infusion in PSBs in their FY22 union budget.

The Ministry of Finance has decided to infuse Rs 145 billion in four PSBs (CBOI – Rs 48 billion, IOB – Rs 41 billion, BOI – Rs 30 billion and UCO – Rs 26 billion) from the remaining budgetary allocation for FY21, through the issue of non-interest bearing (non-transferable) special GoI securities with maturities ranging from 2031 to 2036.

Ind-Ra opines these bonds will be issued at par to the participating banks and the date of issuance will be the date on which the subscription amount is received from these PSBs. The GoI allocated Rs 55 billion to P&SB in 3QFY21.

The agency understands that despite fiscal constraints, the GoI has been supportive over the years in terms of capital infusion in PSBs with Rs 2.5 trillion being infused over FY18-FY20 alone. While prior to FY18, the GoI would do a direct infusion of equity in PSBs, FY18 onwards the GoI has used recapitalisation bonds.

This involved banks subscribing to the recapitalisation bonds issued by the GoI with a maturity ranging between 10-15 years and coupon rates of 7.4%-7.7%. The GoI would then use the funds raised to be infused back in PSBs as equity. PSBs would hold these securities in their investment portfolio under the held-to-maturity category. The GoI paid Rs 58 billion in interest payments on these bonds in FY19 and Rs 162.9 billion in FY20.

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