A government bond is an instrument to raise money from the market with a promise to repay the face value at the maturity date and a periodic interest. A bond issued for the purpose of recapitalisation is called recapitalisation bond.
Working of Recapitalisation bond:
The government will issue recapitalisation bond, which banks will subscribe and enter it as an investment in their books. The bank will lend money to the government for subscribing the bonds.
The money raised by the government through these bonds will go back to bank as capital. This will immediately strengthen the balance sheet of the banks and show capital adequacy. Since the bonds are backed by government, the credit rating is high and risk associated is 0% and hence chances of it becoming a bad loan is null. Near about 1.4 lakh crore is to be obtained and infused via recapitalisation bonds.
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