In a first of its kind move Central Government has issued Rs 5,500 crore in zero-coupon bonds to recapitalise Punjab and Sind Bank (P&SB) by allowing it to park the paper in its held-to-maturity (HTM) category at face value rather than the discounted market rate. This move of capital infusion was approved by the Ministry of Finance on November 10, 2020.
- It should be noted that the Zero-coupon bonds are debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.But this recent infusion is not adhering to this; therefore, the Reserve Bank of India (RBI) may red-flag Rs 5,500-crore zero-coupon bonds.
- The bond will mature in tranches between 2030 to 2035.
The market value of the bonds would be around Rs 2,750 crore. The government will infuse Rs 5,500 crore into equity capital.So, the capital adequacy of Punjab & Sind Bank goes up by Rs 5,500 crore (instead of Rs 2,750 crore). Government is using Rs 100 to create an impact of Rs 200 in the economy. This is indeed a financial illusion and ‘great innovation’ by government.
What is Zero-coupon bonds?
i.These bonds are not tradable, the lender has kept them in the HTM bucket, not requiring it to book any mark-to-market gains or losses from these bonds.
ii.These are non-interest bearing, non-transferable special GOI securities.
iii.Maturity of 10-15 years.
iv.Though zero coupon, these bonds are different from traditional zero coupon bonds on one account — as they are being issued at par, there is no interest; in previous cases, since they were issued at discount, they technically were interest bearing.
–The government’s shareholding in P&SB as of September 30, 2020, stood at 83.06%.
–In 2019-20, the government infused Rs 70,000 crore into PSBs to boost credit for a strong impetus to the economy where P&SB received Rs 787 crore.
–In September 2020, parliament approved Rs 20,000 crore for recapitalisation of PSBs.
Recent Related News:
i.On November 11, 2020 HDFC Bank in Partnership with Visa launched ‘SmartHub Merchant Solutions 3.0’, India’s first comprehensive banking and payment solution for merchants.
ii.On October 30, 2020, the RBL Bank (formerly known as Ratnakar Bank) in partnership with Visa launched the latter’s processing capability “Visa Direct” that allows safe, convenient, real-time and secure funds delivery directly to financial accounts using credit and debit cards.
About Punjab & Sind Bank (P&SB):
Managing Director & Chief Executive Officer– S Krishnan
Tagline– where Service is a way of life
Headquarter– New Delhi