The Hindu Business Line : Second-rung corporates, SMEs rush for T-bills

Banking sources said that along with the second-rung corporates, some of the small and medium-scale enterprises have taken to investing in T-bills in a big way. Second rung corporates and SMEs have traditionally preferred parking their cash surpluses only in bank current accounts.

Only the large corporates, including large software entities, have remained savvy in managing their cash surpluses and parking them in T-bills. Adding to this crowd of investors is the new crop of general insurance companies.

These new non-life insurers have a much greater appetite for T-bills than dated securities, partly on account of their small investment volumes.

Bankers said that the major factor that has sparked the SME rush for T-bills was the difference in yields. Most banks now offer no interest on current accounts.

In the past, some banks encouraged these entities to park their cash surpluses in short-term time deposit accounts in particular 15 days and above. But faced with excess liquidity in the banking system, most banks were discouraging bulk short-term time deposits.

Banks were prepared to accept long-term deposits for a minimum of one-year bulk with riders that interest would not be paid in the event of premature termination.

On the other hand, T-bills offer ready liquidity to the investors, and returns of up to 4.5 per cent. With the potential advantage of capital appreciation, the more aggressive corporates have been able to generate returns in excess of close to 5 per cent to 5.5 per cent.

What has also made investments in T-bills attractive was the increased availability of the instruments. The amounts for 91 T-bills floated are for Rs 500 crore, under the normal borrowing programme, and an additional Rs 1,500 crore for the market stabilisation scheme (MSS). For the 364-day T-bill the amount floated is Rs 1,000 crore, under normal borrowing, and an additional Rs 1,000 crore for MSS.

Corporate investments into T-bills have ensured that the weighted average auction yields are well below the cut-off yields. In last week's auctions, the cut-off yields on the 91-day and the 364-day T-bills were 4.42 per cent and 4.45 per cent, respectively. However, the cut-off yields were lower at 4.38 per cent and 4.44 per cent, respectively.

But bankers said that the preference by these categories of non-competitive investors was biased in favour of the 91-day T-bills. This was evident from the large spreads between the cut-off and weighted average yields.

In fact, the sources said, that most of the non-competitive investors, were actually putting in bids, which were lower than the cut-off yields, leading to T-bill yields which were lower than the repo rates.

Banks, on the other hand, preferred parking in 7-day repos, where the rates were higher than T-bills at 4.5 per cent.