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Banks may lend Rs 3,000 cr to UTI against scrips held

Our Bureau

MUMBAI, July 27

A CONSORTIUM of banks led by the State Bank of India plans to lend around Rs 3,000 crore against shares held by UTI to help it face unit redemptions starting August 1.

Other members of the consortium are Bank of Baroda, Corporation Bank, Allahabad Bank, Oriental Bank with a few others keen to join.

The consortium will cherry-pick shares at the current market prices from the UTI portfolio with the margin being 60 per cent. The funds will bear an interest tag of around 10.50 per cent and the temporary facility may not have a life of over 6-8 months. In the event of UTI being able to sell shares held as collateral by the banks, the Trust will deposit the realisations with the individual banks. UTI and the consortium seem to have come to a verbal understanding and the idea now awaits RBI's nod.

Under the rules, banks cannot ordinarily take a huge exposure on a corporate or UTI and the RBI will have to agree to the deal by making an exception. Second, there is the rule of banks not exceeding 5 per cent of total advances in the share market. Ther e could be some instances of banks in the consortium exceeding the limit and RBI will have grant a one-time waiver for the deal to go through. Thirdly, a bank cannot take an individual exposure exceeding 20 per cent to a single borrower and this rule als o needs to be relaxed by RBI.

Bankers believe share prices of even the best shares cannot drop in six or eight months by 60 per cent, explaining the hefty margin. Call has been ruling at around 7 per cent and at 10.50 per cent, banks could be profitably deploying their excess funds. Sources said the okay of the Finance Ministry may not be necessary though it is quite likely both parties to the deal will keep New Delhi informed. The temporary facility will have to be backed by a long-term financial comfort and this can only come from New Delhi, said bankers.

Bankers do not believe in heavy redemptions starting August 1 but as a caution would like to put in place a line of credit in the event of a run.

Related links:
Banks promise support to UTI
BoB sanctions Rs 300-cr credit line to UTI
Banks agree to give UTI loans at sub-PLR
Banks mull booster dose for UTI -- Concerns mount on future of investments

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