The Hindu Business Line : Primary Dealers report Rs 250-cr loss

PRIMARY Dealers (PD) have reported a loss of Rs 250 crore in the fiscal ending March 2005 against a profit of Rs 1,229 crore the previous year. According to RBI's report , the fall was due to a decline in net interest income in 2004-05 as well as trading losses incurred on account of hardening interest rates.

However, 10 PDs out of 17 posted net profits during the year.

The central bank's report said that the return on average assets of PDs was also negative during the year, reflecting the impact of net losses. The losses suffered by PDs eroded their net worth, which declined to Rs 5,592 crore end-March 2005 from Rs 5,998 crore the previous year.

The shares of total primary purchases by primary dealers for treasury bills and dated securities also declined marginally to 63 per cent and 47 per cent respectively, against 67 per cent and 50 per cent the previous year. The turnover of transactions by PDs (both outright and repo) in the secondary market for treasury bills and government dated securities at Rs 4,66,242 crore and Rs 12,69,454 crore, respectively, constituted 28 per cent and 18.6 per cent of the total market turnover.

The investments by PDs in government securities and corporate bonds also fell. Among sources of funds, unsecured loans fell sharply to Rs 3,800 crore, 59.8 per cent lower than Rs 9,452 crore the previous year. The share of government securities in total assets of PDs dropped to 69.3 per cent at end-March 2005 from 82.3 per cent the previous year. Despite the decline of capital funds of PDs to Rs 5,603 crore from Rs 6,015 crore during this period, they were able to maintain capital to risk weighted assets ratios in excess of the minimum requirement of 15 per cent.

The liquidity support limits for PDs for 2004-05 was fixed at Rs 3,000 crore against the Rs 4,500 crore for the previous year. The liquidity support was made available at the Reserve Bank's repo rate.

Under the Fiscal Responsibility and Budget Management Act, 2003 the Reserve Bank with effect from April 1, 2006 will not be allowed to participate in primary auctions. PDs would then have to underwrite the entire issuance amount of each auction.

With PDs being bestowed with a much larger responsibility compared to the current arrangement, the Internal Technical Group on Central Government recommended that the appropriate restructuring of the PD system be encouraged, with smaller PDs either raising the capital base or merging with parent banks where, there are bank subsidiaries.

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