The Hindu Business Line : PFs, insurers park funds in banks' perpetual bonds

Banking sources said that that both these categories of investors were particularly interested in perpetual bonds. So far two banks have come with perpetual bond issues — Indian Overseas Bank and United Commercial Bank.

The IOB issue was priced at 9.15 per cent for 10 years and 9.65 per cent if the call option is not exercised. The UCO Bank issue was priced at 9.35 per cent for 10 years and 9.85 per cent in the event of the call option not being exercised. Both the PSU banks had opted for the private placement route. In both cases, the bulk of the subscribers were insurers and funds.

Less return on investments

Bankers said interest from provident funds was because they were in need of high yield investments. Most of them are currently faced with deficits. PFs currently invest 40 per cent of their investible resources in government securities (25 per cent in Central government securities and 15 per cent in state government securities). Investments up to 40 per cent are permitted in public sector bonds that include bonds issued by public sector banks.

Since 2002, the investments have generated weighted returns less than their cost of servicing the liabilities. Under current regulations, PFs pay out an interest of 8.5 per cent on their liabilities. However, their weighted average yield on investments is barely 8 per cent. PFs have shifted into a deficit since 2002 when the average yield on 10-year G-Secs slipped below 8 per cent on the back of a liquidity overhang in the markets.

Accordingly, sources said, investing in both tier two and tier one perpetual bonds allowed them to somewhat reduce their deficits and eventually return to a surplus. Perpetual bonds allow them a long tenure of high yields.

In addition, they said some of the PFs were also investing in private sector bank's subordinated debt, taking advantage of the incremental 10 per cent up to which they are allowed to invest in corporate debt.

Insurers lift large volumes of the bank bonds accounting for more than 50 per cent. This is because the yields are attractive to them and fall within the category of approved investments.

Insurers have faced with declining mean yields since 2002. Mean yields dipped below 7 per cent for most of them. The sources said that mean yields, with the arrival of the bank bonds, would now rise to levels seen four years ago since G-Sec yields are also on the ascent.

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