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C.Shivkumar

Bangalore, Aug. 25 Faced with continuing liquidity squeeze, some banks have begun pushing for making special government securities eligible for repurchase operations of the Reserve Bank of India (RBI).

The special government securities include oil, fertiliser and FCI bonds against subsidy dues. Besides, the bonds also included those issued to State Bank of India against rights issue. Currently, none of these categories of bonds are eligible for Statutory Liquidity Ratio.

Moreover, the bonds, despite the sovereign guarantee cover are treated as illiquid instruments. The special bonds are ineligible for repurchase operations of the RBI, leading to their illiquidity. The only categories of borrowings eligible for repurchase operations at the Liquidity Adjustment Facility (LAF) auctions are direct sovereign borrowings and State Development Loans that are guaranteed by the Centre.

The outstanding of the special government securities is currently in excess of about Rs 1 lakh crore. Of this, about Rs 22,000 crore of oil bonds were picked up the Reserve Bank of India through Special Market Operations that began in June this year. However, before the commencement of the SMOs, oil companies had placed at least Rs 10,000 crore of bonds with some of the public sector banks. This was after refiners hit the bank lending exposure ceilings. The bonds were purchased by the banks at steep discounts.

In addition, banks had also picked up fertiliser company bonds at high discounts. Fertiliser companies had also placed the bonds for meeting their working capital requirements, after they hit their credit exposure ceiling of 15 per cent.

However, banks are slowing down their purchases of the special government securities in view of the high illiquidity. Bankers said that although the current yields on the securities were high, in excess of 9.5 per cent, there were few buyers for the bonds. Buyers, if any, insisted on very high discounting rates.

Bankers said the high discounting in turn raised the cost of working funds. In fact, even in the collateralised borrowing and lending obligation (CBLO) market, there were few takers for special government securities. They said the preference even in CBLO trades was for SLR-eligible government securities.

Besides, bankers said, they were also faced with valuation difficulties. The bulk of the special securities with the banks are treated as part of the marked-to-market holdings, either in the “Available for Sale" or in the “Held for Trading” category.

According to the RBI guidelines, the securities are allowed to be valued at 25 basis points above comparable sovereign securities. However, the yield spread between sovereign securities and the subsidy bonds were well in excess of 50 basis points. The 6.96 per cent 2009 oil bond is currently quoted at a Yield to Maturity of 9.85 per cent. The 6.65 per cent 2009 sovereign issue is currently traded at 9.20 per cent.

The only buyer for the securities was the Life Insurance Corporation of India. LIC, bankers said, was prepared to pick up the securities only if it matched their yield expectations. LIC’s yield expectations are close to 9.8 per cent on such securities. In fact, the recent purchase of fertiliser bonds by LIC were at around these yields.

More Stories on : Govt Bonds | Interest Rates

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