The Hindu Business Line : Market awash with funds

Bangalore, Sept. 6 The anticipated redemption of government securities this month along with inflows for subscription to initial public offering of Power Grid Corporation have led to a huge liquidity build-up in the markets.

The build-up was reflected in today’s Liquidity Adjustment Facility auction bids. There were only 19 bids for reverse repurchases, but the amount was Rs 39,175 crore. Reverse repos are placement of securities for siphoning out excess liquidity.

Bankers said that the bids were almost entirely from the public sector banks on account of the redemptions. The bidders included State Bank of India, Bank of Baroda and Indian Overseas Bank.

Redemptions

At least Rs 50,000 crore worth of Government securities are expected to be redeemed during the current month. These include Treasury bills of about Rs 22,000 crore.

Another Rs 30,000 crore of gilts are also expected to be redeemed during the month, bankers said. In addition, Rs 15000 crore worth of coupon inflows are also likely during the month.

Besides, IPOs from corporates such as the public sector transmission monopoly Power Grid Corporation of India Limited are also beginning to attract inflows from qualified institutional investors.

PGCIL is expected to raise close to Rs 1,500 crore through partial dilution of government equity.

Loan prepayment

Bankers also said several corporates were resorting to prepayment of their term loans. This was because they feared that the loans would likely be repriced in the coming months as liquidity tightens. Most of the term advances have repricing covenants built into them.

Bankers also said several PSU banks were waiving penal charges on corporate loan prepayments.

Several large domestic corporates, as a result, have taken advantage of the waiver of prepayment charges and used the window to cut financing costs.

Margins under pressure

Banks were using the prepayment to cut the cost of their liabilities. With credit growth slowing down to about just 21 per cent, banks have cut back on accepting short-term deposits, fearing impact on net interest margins (NIM). NIMs, the difference between interest income and interest expenditure, is already below 3 per cent for most of the public sector banks.

Besides, the effective cost of deposits was also high on account of the high cash reserve ratio of 7 per cent and a statutory liquidity ratio of 25 per cent. Funds via prepayment route were raised in anticipation of tight liquidity ahead of the advance tax payments expected to begin from the middle of the month. Advance tax payments are expected to lead to an outflow of approximately Rs 50,000 crore.

Besides, bankers said that some corporates were also beginning to repatriate their external commercial borrowings.

Such repatriations, however, have failed to soften the forward premia. One-month forward premia is currently about 1.7 per cent.

More Stories on : Debt Market | Financial Markets | IPOs | Power

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page