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C. Shivkumar

Bangalore , Dec. 3

THE Centre has sounded out banks and financial institutions for phase II of the securities buyback programme overruling all reservations.

The second round was intended to take advantage of the prevailing soft interest rates.

Accordingly, banking sources said, this round would result in withdrawal of about all the long-dated high coupon securities and replacing them with low coupon securities through a switch. Currently, the floating stock of high coupon securities is in the region of about Rs 1,50,000 crore.

In the last auction, the Government had replaced some of the high coupon securities with low coupons like the 6.72 per cent 2014 and the 7.46 per cent 2017. This time also, the sources said, they expected the moves to be identical, though the securities to be issued are expected to be even more long-dated. This is because even long-dated low coupon securities have elicited oversubscription in view of the high liquidity in the markets.

Yet, in the last auction, the response was lackadaisical. The buyback elicited a response of about Rs 14,000 crore. The banking sources said that even this time, many were less enthusiastic about this round than the first one.

In fact, most bankers expected to be "talked into participation " in the proposed buyback programme. Only two or three banks were really keen to participate in this round of the exercise. These include banks where the levels of non-performing assets (NPA) are still on the higher side.

Mr Dalbir Singh, Chairman and Managing Director of Central Bank of India, said, ``We will participate in the buyback since it gives us an opportunity to completely clean up our balance sheet.''

For banks which still have arrears in provisions, they still have a substantial tax cushion and the buyback would help increase the coverage along with the tax cushion. Profits earned from the buyback used for meeting provisions are fully exempted from taxes.

However, not all banks share a similar enthusiasm. This is especially true of those banks which already have a high NPA coverage ratio, of close to 80 per cent. These banks are not keen on participating in the exercise. One major reason is that they had sought time-bound changes to Section 36 (viii a) of the Income-Tax Act. This provision in the Act provides for tax exemptions on provisions made for non-performing assets subject to a ceiling of 10 per cent up to 2005. The public sector banks had conveyed that the ceiling of 10 per cent be removed or raised to provide for accelerated/ floating provisions.

But with the Central Board for Direct Taxes opposed to this demand banks with high NPA coverage ratios are in the process of getting rid of the high coupon securities anticipating that the RBI may ``talk them into participation.''

Among the institutions in the market for such high coupon securities, especially the long-dated ones include the life insurance companies, especially the Life Insurance Corporation of India (LIC). As a result, some of the long-dated high coupons, like the 10.71 2016, the 10.03 2019 and the 10.18 per cent 2026 have already vanished from the markets, with the LIC having bought them out. Even after a tax liability on these profits, some of them expect to make large profits during the current year.

But bankers are also worried that such switches would lead to lower yields on investments, though the earnings this year was unlikely to be affected. However, it would imply that the cushion available in the form of hidden reserves undervalued assets would no longer be available. Besides, it would also mean that profits and incomes from treasuries would no longer be available to meet shortfalls in conventional lending operations.

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