The Hindu Business Line : Banks move high coupon SLR bonds to HTM

BANKS have begun shifting all their holdings of illiquid State development loans and statutory liquidity ratio (SLR) securities issued by State Government bodies to the held-to-maturity (HTM) category as part of their portfolio churning exercise.

Bankers said the entire lot of securities shifted to the HTM category were those that were subscribed as part of their SLR obligations. The bulk of these securities that have been moved into the HTM category were those that were issued between 1996 and 2001, when coupon rates were high. All the securities are sovereign guaranteed. Under current guidelines, 25 per cent of the investment portfolio is to be placed in HTM.

The securities moved to the HTM have high coupons. The coupons range between 13.5 per cent and 9.5 per cent are expected to mature only between 2006 and 2011. This would imply that the current yield on securities held in the HTM would be high.

This move by bankers was taken after some of the State finance corporations and State electricity boards unilaterally moved for replacing high coupon SLR bonds, with low coupon securities. What irked bankers' was that most of the States sought the prepayments of the SLR securities on the basis of the outstanding face value, implying there were not prepayment premiums.

Bankers instead said that redemption of State SLR bonds on the basis of current terms was not possible, especially since the value of the high coupon securities have appreciated. The bankers said, "Therefore there is no way we are going to permit premature redemption of non-SLR securities." Besides none of the SLR securities issued by the State Government have any early redemption options

The State governments and their utilities had proposed issuing of low coupon securities for refinancing the SLR securities. These new securities issued would not be eligible for SLR. This implied that the securities now sought to be issued by the State utilities and State finance corporations were entirely backed by the guarantees of the respective State governments.

None of the banks was prepared to accept these new securities as replacement for the SLR bonds.

This was in view of the history of defaults on guarantee obligations by almost all the State governments. On the other hand, any default in debt servicing in SLR loans allowed bankers to recover their dues from Central transfers.

In the case of the State government guaranteed securities, there are no such covenants, which allow bankers a lien on the Central transfers.

Besides, few States have a sinking fund in place for meeting the redemption payment obligation on the sub-sovereign guaranteed securities.

As a result, the defaults on State Government securities are in excess of Rs 50,000 crore. Despite the defaults, bankers are wary of invoking the guarantees. Bankers fear that this extreme step would virtually amount to declaring state governments insolvent, prompting all lenders to follow suit