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C. Shivkumar

Bangalore , Sept. 16

A CLUTCH of public sector banks are preparing to take out some of the standard assets of financial institutions in a bid to increase the size of their asset books.

Top bankers said among the institutions being targeted for such asset buyouts are Unit Trust of India (UTI), Industrial Finance Corporation of India (IFCI) and Industrial Development Bank of India (IDBI). The assets to be bought out include the institution's shares in consortium loans.

Mr P.A. Sethi, Executive Director, Vijaya Bank, said, "We are open to acquiring good quality assets from financial institutions and consortium members, including UTI," he said.

In fact, moves to strengthen Tier one capital by public sector banks such as Indian Overseas Bank and Vijaya Bank were specifically intended to increase their exposure limits. Banks are currently covered by an exposure limit of 15 per cent of their net worth to any specific industry/industrial groups. Consequently, banks with low net worth were not in a position to increase their lending limits. Besides, raising Tier two capital in the form of subordinated bonds, the bankers explained, was no solution. This was because Tier two capital is not treated as part of the net worth.

The bankers said with institutions such as UTI opting out of the corporate debt restructuring packages, public sector banks had identified opportunities for increasing their risk-weighted assets. The CDR packages include renegotiation of some of the terms of the existing standard assets to lower interest rate loans. Bankers, however, said such kind of a takeout pricing would not impact them. This was because banks currently have a weighted average cost of working funds of about 5.5 and 6 per cent. FIs have a considerably higher cost of working funds. With the recoveries of non-performing assets, banks' funding costs could fall below 5 per cent, they added. Since some of the original assets were funded at rates as high as 15 per cent, even if the assets are bought out at current prime lending rates or renegotiated as part of the CDR, banks still expected to make a spread of about 4.5 per cent.

At present, the Credit-Deposit ratio is barely 53 per cent. This low ratio has been worrying some of the banks, especially since yield on Government securities are down and could have a negative impact on their average yield on assets.

Bankers said asset buyouts were also intended as "part of a fiscally neutral bailout package" for FIs faced with large asset liability mismatches. This essentially implied that the quantum assistance required from the Government by way of equity infusion for the financial institutions would considerably come down through these asset sell-outs. Besides, the profits earned by selling some of the standard assets, the bankers said, would also help FIs make large provisions on some of the bad assets.

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