Context: The Ministry of Finance is looking at other avenues for affordable capital infusion, including setting up of a Bank Investment Company (BIC).

Background

• The RBI has raised concern over the issuance of zero-coupon bonds for the recapitalisation of public sector banks (PSBs).
• Concerns were raised with regard to calculation of an effective capital infusion made in any bank through this instrument issued at par. 
• The mechanism had a cost of interest payment towards the recapitalisation bonds for PSBs.

About Bank Investment Company (BIC)

• It was introduced in 2014 by the Reserve Bank of India’s (RBI) PJ Nayak Committee Report on ‘Governance of Boards of Banks in India’.
• The report recommended transferring shares of the government in the banks to the BIC which would become the parent holding company of all these banks as a result of this, all the PSBs would become ‘limited’ banks.

Power and Functions

• It will be autonomous and it will have the power to appoint the board of directors and make other policy decisions about subsidiaries.
• It would look into the capital needs of banks and arrange funds for them without government support.
• It would also look at alternative ways of raising capital such as the sale of non-voting shares in a bid to garner affordable capital.

Benefits

• The dependence of PSBs on government support would come down and ease fiscal pressure.

Present Status

• The government, as per one of the Committee’s recommendations, has already set up a Bank Boards Bureau (in 2016) for selecting the top management of PSBs, it has kept the BIC proposal on hold so far.

What is the Bank Recapitalisation?

• Bank recapitalisation means infusing more capital in state-run banks so that they meet the capital adequacy norms. 
• The government, using different instruments, infuses capital into banks facing a shortage of capital. 
• The government infuses capital in banks by either buying new shares or by issuing bonds.
• Indian public sector banks are emphasized to maintain a Capital Adequacy Ratio (CAR) of 12%.
• CAR is the ratio of a bank’s capital in relation to its risk-weighted assets and current liabilities.

Significance

• The recapitalisation is necessary because the PSBs are facing financial problems and they need money in the context of rising bad debts.
• Similarly, they need funds to meet the higher capital requirements under Basel III norms.
• This helps the government in maintaining its fiscal deficit target as no money directly goes out from its accounts. 

About Bonds

• A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). 
• These bonds have a maturity date and when once that is attained, the issuing company needs to pay back the amount to the investor along with a part of the profit.

What are  Zero Coupon Bonds?

• These are special types of bonds issued by the Central government specifically to a particular institution.
• It is not tradable and not transferable.
• It is limited only to a specific bank, and it is for a specified period.