The Hindu Business Line : States looking beyond small savings for funds

Exploring options
Bank deposit accretions have been growing at an average of 25% across all public sector banks.
Most of the accretions are said to have come from distintermediation of resources from small savings.
Banks show little interest in state development loans.

C. Shivkumar

Bangalore, Aug. 10 With small savings facing the heat from high bank deposit rates, States are quietly beginning to make a beeline to financial institutions like Life Insurance Corporation (LIC) for meeting their resource requirements.

Bank deposit accretions have been growing at an average of about 25 per cent across all the public sector banks, though some banks have reported growth rates as high as 29 per cent.

The accretions, sources said, have to a large extent come from distintermediation of resources from the small savings accounts, pushing up outstanding bank deposits to about Rs 28 lakh crore currently.

Returns

The disintermediation was triggered by the difference in returns between bank deposits and national small savings schemes. Small savings at best offer a yield of about 8.5 per cent for five years. Bank deposits on the other hand offer rates of over 9.5 per cent for maturities over this period.

In fact some public sector banks are offering returns of over 10.25 per cent also. Sources said that since the tax treatment of both categories of long term deposits were identical, preference had switched in favour of banks.

But such a switch, the sources said, had become costly for States. This was because most of the State Governments had banked on small savings account for meeting their resource requirements for the current year.

In fact States like Karnataka have not borrowed funds from financial institutions or markets since the beginning of this financial year, relying largely on small savings to contain borrowing costs. Most States treat small savings as a cheap source of funds.

Options for StateS

With the slowing down in accretion to the small savings accounts, States are beginning to feel the pinch. The sources said that States have the option of either cutting back their capital expenditure or to raise resources through alternative borrowings.

The sources said that market borrowings were one option. However, given the current SLR portfolios of banks at over 31 per cent against the mandated 25 per cent, there was little appetite for State Development Loans (SDL) from banks.

Besides, banks were interested only in short dated papers, in view of liquidity concerns. Consequently, during the last few auctions, most of SDLs were picked up entirely by insurance companies.

Insurers interested

Both life and general insurers, particularly life insurers, have the appetite for long dated papers. In fact, even insurers preferred advancing funds to States through SDLs in view of the sovereign guarantee cover. Besides, SDLs also meet their average yield expectation that is currently about 8.5 per cent. SDLs are currently priced at anywhere between 30 and 50 basis points over ten year sovereign papers.

The sources said that unlike in the past, States also preferred this route, since insurers advancing funds to States have insisted assignment of revenues, backed by funded State Government guarantees.

Above all direct lending from insurers or through financial institutions to States cost above10 per cent, the sources said. SDL placement mitigated lender concerns in view of the sovereign guarantee cover.

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