Category: Banking & Finance

Two of these banks, Indian Overseas Bank and Central Bank of India are among the four banks shortlisted by the government for privatisation.

Indian Overseas Bank, Central Bank of India and UCO Bank are currently under Reserve Bank of India’s prompt corrective action (PCA) framework that puts several restrictions on them, including on lending, management compensation and directors’ fees.

Capital infusion

Of the total infusion, Rs 11,500 crore has gone to these three banks under PCA while the remaining Rs 3,000 crore has been infused into Bank of India. According to a government notification, Rs 4,800 crore has been provided to Central Bank of India, Rs 4,100 crore to Indian Overseas Bank and Kolkata-based UCO Bank has got Rs 2,600 crore.Government Notification

The capital infusion will help these banks to come out of the Reserve Bank of India’s prompt corrective action framework.

Bringing the banks out of PCA could boost their valuations in the event of privatisation.

Central Bank of India has 33,000 staff, while Indian Overseas Bank employs 26,000.

The PCA status

All three banks under PCA Indian Overseas Bank, UCO Bank and Central Bank have reported net non-performing assets (NPAs) below levels that trigger PCA. However, on the proforma net NPA front, Central Bank falls short as its NNPA is 6.58% against the 6% required to be out of PCA.

Even after PCA exit, these banks may still be under RBI watch.

Most of the large state-owned lenders — including State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Union Bank of India, and Indian Bank — have already raised money from various market sources, including share sale on a private placement basis.

Rs 3.5 lakh crore bet

The government in the last five years, apart from merging some smaller banks with bigger ones, has spent Rs 3.5 lakh crore in the last five years on recapitalising public sector banks.

This has been financed partly by taxpayer money and partly recapitalisation bonds, including the discounted zero-coupon bonds sold to PSBs that are to be recapitalized.

Zero-coupon bonds

The government is unlikely to take zero-coupon bond route to further recapitalise public sector banks after the Reserve Bank expressed some concerns in this regard, sources said. The government, they said, would resort back to recapitalisation bonds bearing a coupon rate for capital infusion in these banks.

To save the interest burden and ease the fiscal pressure, the government last year decided to issue zero-coupon bonds for meeting the capital needs of the banks.

The first test case of the new mechanism was a capital infusion of Rs 5,500 crore into Punjab and Sind Bank by issuing zero-coupon bonds of six different maturities last year. These special securities with tenure of 10-15 years are non-interest bearing and valued at par.

However, the RBI raised some concerns with regard to the calculation of an effective capital infusion made in any bank through this instrument issued at par.

Since such bonds usually are non-interest bearing but issued at a deep discount to the face value, it is difficult to ascertain net present value.