The government has decided to allow commercial banks issue zero coupon bonds to raise long-term funds, according to the Finance Bill presented in the Lok Sabha today.

Zero coupon bonds, which are issued at a discount to the face value and where interest is in-built, are currently being issued by infrastructure companies and public sector organisations.

Finance minister Pranab Mukherjee today allowed "scheduled banks, including nationalised banks, to issue zero coupon bonds to source their long-term funds."

The Finance Bill proposes to make relevant changes in the Act with retrospective effect from 1 April 2009.

The zero-coupon bonds will help banks to raise Tier II capital, depending on their appetite for funds.

But, with the government front-loading its borrowing for fiscal 2009-10, bond yields fell across the board by 20-30 basis points. This is expected to affect banks' borrowing programme.