The government had to impose a temporary levy to ensure that it had adequate funds to meet the cost of the rescue package. However, this was temporary and the government raised the levy multiple times to meet the costs. The money raised from this levy was spent only on bank recapitalisation, debt restructuring and on the recapitalisation of NPAs. The government also allowed banks to raise funds from the market and to issue bonds.
After the first bail out, the government asked NABARD to issue treasury bills. NABARD agreed to issue government bonds only after getting the green signal from the cabinet. The treasury bills were sold to overseas investors and were received in US dollars. NABARD then issued treasury bills in India. These bonds raised (over 100 billion) from abroad and (over 90 billion) from domestic sources. The bonds were sold at a lower interest rate than those offered by the RBI.
The government announced a further on 30 April 2009, in addition to the previous allocation. The new fund was to be used for debt restructuring of stressed companies, the banks, as well as state electricity boards. There was also a possibility of an allocation to fund the new financial year that started on 1 April 2009.
Second bailout package
The second bailout package was announced by the Government of India on 13 August 2009. This package was approved by the cabinet on 21 September 2009. The package comprises four separate schemes:
the Indian Rupee Debentures (IRD) scheme
the Indian Rupee Medium Term Notes (Mtn Notes) scheme
the Government’s Asset Reconstruction Company (ARC) scheme
the Reconstruction of Financial Assets and Enforcement of Security Interest (RFAESI) scheme
These four schemes will raise million (US$ billion) for the bailout. They are for recapitalizing the state-owned banks and the state electricity boards that defaulted on payments to power generation companies. A portion of this is to be repaid in cash and the rest in bonds.
The scheme also has features to help the restructured companies as well as the banks to repay the government. For the banks, the bonds would provide a market for their loans so that the banks’ bad assets would be reduced. For the borrowers, the scheme would provide debt-equity swap facilities and allow them to convert part of their debt to equity. Both of these provisions would reduce the need for the banks to raise additional funds in the future.
The first part of the programme would require from existing government debt and from foreign institutions. It is expected to raise up to from domestic banks and from foreign banks. Since the entire package of Rs 10,000 billion (US$ billion) was being sanctioned from the past, it will not be a fresh borrowing.
The money raised from these measures will be used for three purposes. First, to recapitalize state-run banks. Second, to pay for the government to buy bonds to repay the bondholders (or holders) of the state electricity boards. Third, the government is also expected to use the to create a fund to help the state-run power generation companies (DISCOMs).
The will also be used to help the companies that received loans from the banks. It is being used to facilitate the swap of debt for equity or to restructure loan payments. It will also be used to pay for the debt restructuring and interest rate swaps for the banks. The rest of the money will be used to buy government bonds to reduce the government debt burden.
The National Reconstruction Credit Corporation is the agency for doing this. It will raise these funds from the existing government debt and funds from commercial banks and international financial institutions.
The National Reconstruction Credit Corporation, is part of the newly created state owned development finance institution, the National Development Finance Corporation. As per the announcement made by the finance ministry on 28 July 2007, the National Reconstruction Credit Corporation is also being set up to promote industrialization, infrastructure, power generation and development. This will be done by making use of the existing credit rating agencies like S&P, Moody’s and Fitch and their ratings of bonds and loans issued by the government. The plan also involves the creation of the state-owned Development Finance Corporation, which will promote industrialization, infrastructure development, power generation and development.
If you are interested in more details about how to play with the government-imposed levy, give a call at (888)489-4889.