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C. Shivkumar
Abhrajit Gangopadhyay

BANGALORE, Feb. 18

PUBLIC sector banks have imposed preconditions on the Government's proposal to switch high-coupon securities with low coupon bonds.

Banking sources said here, "We are not opposed to the Government's proposal for swapping of bonds and shrinking the revenue deficit. But we should not end up as losers in the process." Larger banks would not be averse to the underpricing of the securities for the proposed buy-back, though other players would prefer a market-determined pricing, sources indicated. Underpricing would imply offering the buy-back at a discount to current market prices.

However, any buy-back at concessional pricing could be considered only if they were given some major fiscal concessions, sources added. Among the fiscal concessions being sought by the banks for such buy-backs are tax exemptions for income receipts through such premature redemptions and exemption of the special reserves created for investment fluctuation from income tax.

In addition, the banks have also sought treatment of the special reserves or the Investment Fluctuation Reserve (IFR) itself as part of Tier I capital. Banks were advised by the Reserve Bank of India last year to attain a minimum IFR of at least five per cent of their investment portfolio over a five-year period or a maximum of 10 per cent. These reserves are currently treated as part of Tier II capital since the RBI has taken the stand that the reserves were out of revaluation of the investment portfolios.

The public sector banks have argued that since such reserves were created out of trading profits, they should accordingly be treated as Tier I capital. If this were done, capital adequacy of most of the banks would be above 12 per cent. In fact, even the banks that have fallen short of the capital adequacy ratio (CAR) would be in a position to meet the current norms, they added.

Among the high-coupon securities in the portfolio of banks as part of their Statutory Liquidity Ratio (SLR) are 14 per cent coupon, 13.85 per cent and 13.65 per cent securities. The combined stock of these securities is currently estimated to be Rs 13,500 crore. The market price of these securities, on the basis of the current yield to maturity, is almost 75 per cent higher than the face value.

The sources said that these were just a few of the securities that were being offered for buy-back. In fact, there were several securities with double-digit coupons. These securities were issued between 1996 and 1997 when liquidity was tight in the markets.

Given the high value of these securities, most of them have vanished from the markets. Instead most of the banks are holding it in their `held to maturity' or `held for trading' categories. Only the low-coupon and newly issued bonds were being put in the available for sale category.

An outright switch would mean that these high coupon papers would be replaced with low coupon bonds, for a longer duration.

This in turn means that banks would be deprived of the high-coupon flows for the residual period, which in turn would impact their incomes. Besides, none of the bonds issued at that point of time had early exit option built into them. Consequently, the banks said that they would not be interested in picking up fresh securities. This is especially in a situation where the investment-deposit ratios are 41 per cent as against the prescribed SLR ratio of 25 per cent.

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