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Friday, May 10, 2002

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Urban co-op banks plan primary dealer for gilts

Sarbajeet K. Sen
Harish Damodaran


SMARTING under the impact of the recent Home Trade scam involving fraudulent dealing in gilts through brokers, a few major urban co-operative banks (UCBs) are planning to join hands for establishing a primary dealer (PD) to exclusively trade in Government securities on their behalf.

The banks that are currently involved in the exercise include the Pune-based Cosmos Co-operative Bank and the Mumbai-based Saraswat Co-operative Bank and Jan Kalyan Co-operative Bank.

The proposal is being actively backed by the National Federation of Urban Co-operative Banks and Credit Societies Ltd (NAFCUB). "We are also trying to rope in some larger co-operative entities such as Iffco and Kribhco in the venture, which will enable us to meet the Rs 50-crore minimum paid-up capital required for a PD under the existing Reserve Bank of India (RBI) norms," Mr D. Krishna, Chief Executive, NAFCUB, told Business Line.

He said that the proposal was still at a nascent stage and would be discussed at a meeting of select UCBs to be held shortly in Mumbai.

"The idea of setting up our own PD is to route the SLR investments of all UCBs through this entity which would do away with the need for individual banks to enter into gilt transactions through brokers," Mr Krishna said.

As on March 31, 2001, the aggregate deposits of 1,826 UCBs reporting to the RBI was Rs 80,000 crore. With outstanding loans of Rs 51,680 crore, the net investments of these banks works out to around Rs 39,000 crore.

Currently, UCBs deploy the bulk of their SLR funds as deposits with State co-operative bank and district central co-operative banks. But with effect from April 1, 2003, all the 51 scheduled UCBs, which account for over 40 per cent of the total UCB deposits, are required to maintain their entire mandated SLR investments (amounting to 25 per cent of their net demand and time liabilities) in G-Secs and other approved securities. The UCBs have also been asked to unwind all their inter-UCB deposits by June this year.

"Our total deposits (of both scheduled and non-scheduled banks) would now be in the region of Rs 1,00,000 crore. Assuming even a 15 per cent SLR requirement, the minimum amount invested in gilts will come to Rs 15,000 crore. It makes eminent sense to have our own captive entity to handle this volume of investments," Mr Krishna added.

The proposed PD would particularly be of help to small urban banks with deposits of less than Rs 25 crore headquartered in small towns. Even these banks, from September 30, 2002, are required to invest 10 per cent of their deposits in G-Secs.

"There are hardly any PDs or public sector banks now who can assist these banks for investing their SLR funds, so as to obtain the maximum return. As a result, these banks are forced to turn to brokers who invariably palm them off unwanted, illiquid securities," Mr Krishna said.

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