Bonds worth Rs 1.35 lakh crore are being issued to recapitalise public sector banks. The money will flow from banks, flush with funds after demonetisation, to the issuer and then pumped back as capital. These banks are struggling with high non-performing assets, and the money will help them absorb losses from higher provisioning.
The government is looking at a longer maturity to ease the pressure on banks as they do not have enough avenues for lending yet. There may also be some easing of interest rate pressure via zero coupon bonds with bullet repayment on maturity. It remains to be seen who will be the final issuer of these bonds. If the government does so, the interest outgo will have implications for both the budget and the fiscal deficit.