The Hindu Business Line : G-secs buyback: No special treatment for smaller banks

THE Ministry of Finance has decided on a level playing field for all banks in the government securities buyback exercise with no special treatment to be set aside for the smaller entities among the pack of public sector banks.

Some of the smaller public sector banks had sought the Government's help in keeping them in a separate section in the auction process since they felt that they would not be able to bid competitively against the larger banks.

It had been pointed out that the larger banks with much larger portfolio of government securities would be able to outbid the smaller banks since the latter would not afford to offer discounts that the larger banks might be willing to offer.

However, after debating over the issue, the Government has now decided that there would be no separate treatment to any segment of the PSU banks. "Everyone would have to play by the same rules during the auction. There would be no special treatment of any banks," senior Finance Ministry officials said.

The Government has identified 24 illiquid and high-coupon bearing securities being held by the banks as part of their gilts portfolio to be put on the block during the buyback exercise. The buyback exercise is expected to commence within a couple of weeks.

The smaller banks had pointed out to the Government that though the identified illiquid securities might be a small portion of the overall government securities portfolio of larger banks enabling them to part with them easily, the same might form a substantial chunk of their overall government securities holding of the smaller banks.

"It might be small for them, but it is big for me," a Chairman and Managing Director of a relatively small PSU bank said indicating the identified securities to be put up for buyback.

Moreover, he pointed out that the profits earned by the smaller banks on these high-yielding securities as a proportion of their overall profits much higher compared with that of the larger banks. Thus, they felt, that the smaller banks' long-term profitability would be hit harder as compared to the bigger banks.

The PSU banks have been clearly split down the middle between the `larger' and the `smaller' ones on the buyback exercise. Thus, while some of the larger banks have welcomed the Government's move and have privately said that they would be willing to offload their entire portfolio of the identified securities, the smaller ones have been guarded in their response in view of the adverse impact on their future profitability.

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