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The government has decided to allow commercial banks issue zero coupon bonds to raise long-term funds, according to the Finance Bill presented on Monday.
At present, zero coupon bonds which are issued at a discount to the face value and where interest is in-built, are allowed to be issued only by infrastructure companies or public sector organisations.
The Budget presented by finance minister Pranab Mukherjee day allowed 'scheduled banks including nationalised banks to issue zero coupon bonds to source their long term funds.'
The relevant changes in the act will be made with retrospective effect from April 1, 2009, as per the finance Bill.
A top official working in the treasury section of a government bank said it amounts to giving banks one more instrument to raise Tier II funds.
Banks would decide on raising funds through the new instrument based on their appetite for funds.