Zero Coupon Bonds – Zero-Coupon Recapitalization Bonds
- The government has issued special Zero-Coupon Recapitalization Bonds worth Rs. 5,500 crore for recapitalization of Punjab and Sindh Bank.
- Zero-Coupon Bonds are non-interest bearing, non-transferable special GOI securities.
Objective:
This will improve the Capital-To-Risk Weighted Assets Ratio (CRAR) of these banks.
Capital-To-Risk Weighted Assets Ratio (CRAR)
- CRAR is the ratio of total assets of a bank to its risk-weighted It is also known as Capital Adequacy Ratio (CAR).
- Indian public sector banks are emphasized to maintain a CAR of 12%.
- When a bank is unable to maintain CAR due to rising non-performing assets (NPAs), then state-run banks infuse capital through bonds or any other way to meet capital adequacy criteria.
Bank recapitalization:
- The purpose of bank recapitalization is to provide additional capital for banks so that the capital adequacy criteria required for the successful operation of the bank can be met.
- The Government of India is the largest shareholder in public sector banks, so in the time of a crisis, the government is also responsible for the recapitalization of these banks.
- Thus the Reserve Bank of India and bank regulators prevent commercial banks from taking excessive risks and going bankrupt.
Zero Coupon Bond:
- Zero-Coupon Bonds are non-interest bearing, non-transferable special securities of the Government of India. They are also known as pure discount bonds or deep discount bonds. It is purchased at a discounted price and no coupon or periodic interest is paid to the fund holders.
- An equal difference between the purchase price of the zero coupon bond and the maturity period indicates the return of the investor. Zero-coupon bonds are usually issued for a period of 10 to 15 years.
Difference between Zero Coupon Bonds and Regular Bonds:
- The difference between a regular bond and a zero-coupon bond is the payment of interest, otherwise known as coupons. A regular bond pays interest to bondholders, while a zero-coupon bond does not issue such interest payments. Instead, zero-coupon bondholders merely receive the face value of the bond when it reaches maturity. Regular bonds, which are also called coupon bonds, pay interest over the life of the bond and also repay the principal at maturity.
Non-Performing Assets (NPAs):
- Banks’ loans are included in the NPA when the outstanding installment of interest and the principal amount is not repaid within 90 days from the due date.
Effect:
- Increasing NPAshas three main effects on banks:
- The lending capacity of banks decreases.
- The profits of banks decrease.
- The cash flow of banks decreases.
Recapitalization policy of banks:
It may be noted that the Government of India has decided to give ₹ 2.11 lakh crore as additional capital to the banks to improve the condition of the banks Of this, ₹ 1.35 lakh crore is planned to be given in the form of recapitalization bonds, out of the remaining ₹ 76000 crores, ₹ 18,000 crores will be sanctioned from the budget under the Indradhanush Yojna and the remaining ₹ 58,000 crores will be raised from the banks themselves. The recapitalization will strengthen the capital base of banks and it will help them to build credit.
Punjab & Sind Bank:
- Punjab and Sindh Bank is a GOI undertaking, which was established on 24th June 1908 with the name of Punjab and Sindh Bank Limited in Amritsar, Punjab.
- The bank changed into a nationalized bank on 15th April 1980 under the Bank Acquisition Act and was renamed Punjab & Sind Bank.
Source – PIB, Indian Express, The Hindu
