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Banks mull booster dose for UTI -- Concerns mount on future of investments

Sarbajeet K. Sen

Shaji Vikraman

NEW DELHI, July 5

THE banking sector is preparing to step in for a temporary bail-out of the Unit Trust of India (UTI), even as concerns mount within public sector banks on the future of their investments in the US-64 scheme which has been suspended for six months.

The possibility of a line of credit against collateral of securities held by UTI figured prominently during discussions held today between the senior management of the Trust and the Finance Secretary, Mr Ajit Kumar.

The liquidity option being worked out for small investors could be based on a margin system, with the price differential over the net asset value (NAV) to be adjusted at the time of the switch-over to the daily NAV which is expected to be announced befor e December.

"We might have to ultimately come to the assistance of UTI by providing some funds to it against mortgage of securities held by it," the Chairman of a leading public sector bank told Business Line.

Top banking industry sources say that UTI has approached a few banks for a line of credit and has already picked up around Rs 500 crore from a Mumbai-headquartered public sector bank.

Bankers feel that coming to the rescue of UTI would in a way be beneficial to banks themselves as the aggregate investments by the banking sector in US-64 could easily run into a few thousand crore rupees.

They said that unlike corporates, which went in for heavy redemption of their holdings in US-64 during April and May, banks have been holding on to their investments in the scheme.

"Liquidity was the main reason that we parked our surplus funds in the UTI schemes. Now, it would perform as a fixed-tenure product as the investment would remain locked in for the next six months," one top banker said.

Another concern expressed by bankers was on the provisions that banks might have to make on account of the depreciation of their investment in the scheme, should the unit price tumble under the turbulent conditions.

"No one knows where the NAV will stand or the quantum of loss that would have to be borne by the banks," said the chief executive of another bank.

There are also fears that things might worsen once UTI switches over to the daily NAV system for the US-64 scheme. "The NAV of US-64 is most likely to be much below the earlier repurchase price of around Rs 14-15 and might even be below par. Linking repu rchase to NAV could lead to huge losses to the banks," the treasury head of a bank said.

Bankers also felt that before preparing any bail-out plan, the Government should undertake a complete study of the problems afflicting UTI. "Was there any serious study of the functioning of the Trust when the Government put together a Rs 3,300-crore bai l-out package the last time around? Without a thorough probe, any talk of another bail-out would not be in the long-term interest of the investors or the Trust itself," one top banker said.

All options being considered

THE Government is considering all options to protect the interests of millions of investors who have been hurt by the US-64 episode, the Finance Minister, Mr Yashwant Sinha, said on Thursday.

Mr Sinha, however, declined to indicate anything on a bail-out for UTI saying that it was an epithet that the media was using. On Wednesday, the UTI management had said that one of the proposals to be forwarded to the Finance Ministry could be a bail-out package. A senior Finance Ministry official had said on the same day that it was too premature to talk about a bail-out for UTI.

"The Government will not let down a single investor in the country's largest mutual fund," Mr Sinha told reporters. The Government was uncomfortable, however, with UTI's decision to ban sales and repurchase for six months. "It is an issue we would look i nto," he added.