The bill for the much acclaimed ₹2.60-lakh-crore bank recapitalisation programme of the Centre is now becoming apparent. Recapitalisation bonds were issued to banks in tranches between January 2018 and March 2020.

The Centre has had to cough up about ₹48,000 crore by way of interest on the recap bonds between FY19 and FY21 (budgeted). Assuming that there are no further issuances, the Centre could end up paying about ₹1.2 lakh crore as interest on these bonds over the next five fiscals (starting FY21) and about ₹2.2 lakh crore until FY28, when the first set of bonds come up for repayment.

These figures are worked out, based on the interest amount put out in the Budget 2020-21 and details of bonds issued, compiled from the gazette notifications issued by the government to the Ministry of Finance (Department of Economic Affairs).

The bigger worry is that despite the humungous amount pumped in till now, many PSBs still require a substantial amount of capital. Back-of-the -envelope workings suggest that at least ₹1 lakh crore of recapitalisation will be required in FY21. Another round of recap bonds to infuse capital into ailing banks would further increase the Centre’s interest burden.

“The pandemic crisis has worsened the Centre’s finances and widened the fiscal deficit. Interest on recap bonds will be an added burden for the Centre, over the next few years,” says Soumya Kanti Ghosh, Group Chief Economic Advisor to State Bank of India.

The Centre will also have to start setting aside money to repay the bonds when they come up for repayment eight years from now. Based on the information available, it will have to repay about ₹21,000 crore in 2028, then ₹40,000 crore annually between 2029 and 2033, and nearly ₹20,000 crore in 2034.

“Switching of government bonds — swapping bonds having shorter maturity with longer tenure bonds — is often done to elongate the maturity and lower the repayment burden of the government in a given year. But in the case of the special recap bonds, such a switching may not be possible, which implies that the government will have to repay bonds that come up for maturity in the next eight to ten years,” explains Ghosh.

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Special bonds

As part of the recapitalisation programme, the Centre borrowed from banks by issuing bonds to PSBs. This money was then pumped in as capital into public sector banks (hence not counted under the fiscal deficit calculation). Recap bonds are special government securities which can be subscribed to by only banks. The bonds are issued at par and are not transferable.

These bonds are repayable at par on the date of maturity, and interest will be payable at half yearly intervals. Banks can hold these securities as held-to-maturity (HTM) to avoid reporting mark-to-market losses every quarter.

In January 2018, the first of such bonds was issued to 20 banks, amounting to ₹80,000 crore, with maturity ranging from 2028 to 2033 and coupon rate of 7.35-7.68 per cent.

In the next set of bond issuances until September 2018, coupon rates had climbed to 7.74-8.1 per cent. But since then rates on these recap bonds have steadily declined, in line with the fall in interest rates in the economy. The recap bonds issued in March 2020, carried coupon rate of 6.13-6.28 per cent.

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