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US-64 out of favour with banks


Ashok Jainani

MUMBAI, June 12

SOME banks have removed UTI's Unit Scheme-64 (US-64) from the list of approved securities for providing loan against securities under their respective schemes. US-64, the largest mutual fund scheme and considered as a sovereign security with highest safe ty some time ago, has been included among a host of now lesser-known infotech companies by Citibank. Some have increased the margin cover to protect their portfolio.

The move could not have come at a worse time for UTI which is facing redemption pressure following poor performance over the last few months. US-64 is not the only scheme facing redemptions; all UTI schemes together in the last 10 months have suffered a net outflow of Rs 633 crore. When contacted, the UTI Chairman, Mr P.S.Subramanyam, was not willing to comment on the issue.

There is increasing uncertainty over the fate of the scheme after it is linked to net asset value (NAV) by February 2002. With massive redemptions of over Rs 2,000 crore in May alone, the gap between the scheme's sale price and the current NAV has widene d.

The list of approved securities under Citibank's Stock Power, the scheme for loan against securities, revised on June 6 has excluded US-64 along with some other companies, including those of infotech and media.

US-64 units are not included in the list of approved securities of ABN Amro Bank either. ABN Amro sources said that the scheme was not included earlier and they have not yet taken a decision whether to include it in the next list.

Sources said that Citibank has stopped giving fresh loans against US-64 units and in fact, has sent additional margin calls to existing customers. Earlier, Citibank advanced loans against US-64 units with a margin cover of about 40 per cent. Recently, th e bank issued letters to existing customers for increase in margin to about 60 per cent. Citibank officials did not like to specify any reason for the decision which is ``taken in the normal course of business''.

Banks seem to be concerned about the risk associated with the scheme being made NAV-driven shortly. Going by all indications and corroborated by senior UTI sources, the existing NAV of the scheme is much lower than the sale price. The bankers would not l ike to take a risk in case the borrowers do not honour to fill the gap between the borrowed amount and NAV when the scheme goes NAV-driven.

Standard Chartered Bank increased the margin cover to 50 per cent on the July 2000 repurchase price, taking the effective cover to over 60 per cent on the current sale price. On May 25, HDFC Bank increased the margin from 35 to 40 per cent on the July 20 00 sale price, thereby collecting an effective margin of over 50 per cent.

The HDFC Bank Managing Director, Mr Aditya Puri, said that they do not see the scheme becoming problematic. ``Margin over NAV could be adjusted to cover the difference,'' Mr Puri said.

The large-scale redemptions by corporates in May 2001 also put those who stay invested in the scheme at a loss. In the current administered price mechanism for US-64, those opting for early exit will benefit at the cost of those who stay invested till th e scheme becomes NAV-driven, especially if the market continues to remain sluggish.

The aggressive investment approach tilted towards equity and more so towards the technology sector in a balanced scheme is said to be the main reason for the scheme's poor performance.

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