The Hindu Business Line : Banks push States to close loans

Redeem loans
This year, two States, Rajasthan and Orissa, redeemed their outstanding state development loans for an aggregate amount of about Rs 395 crore.

Bangalore March 8 Faced with slack deposit growth, banks are looking for new ways to generate cash. One such idea — ask State governments to redeem the loans taken from banks. That's not entirely a step that will help just the banks. The State governments too get to close their high-cost loans and go in for new loans at comparatively lower rates.

Bankers said most of them had investments in government securities (or loans) at 33 per cent of deposits as against the prescribed statutory liquidity ratio of 25 per cent. Redemption or buyback of State government securities would bring down the ratios and at the same time help improve liquidity position. They said almost all the State government securities in their portfolios lacked liquidity, since there were no takers for them in the secondary markets, unlike Central government securities.

Besides, insurance companies that traditionally have an appetite for SDL (state development loans) securities were also not interested, since the residual maturity was under five years. Life insurers' preference is for securities with residual maturities in excess of 10 years.

This year, two States, Rajasthan and Orissa, had redeemed their outstanding state development loans for an aggregate amount of about Rs 395 crore. The buybacks comprised a mix of both high and low-coupon securities held in the banks' HTM (Held to Maturity) category of investments. The buybacks had resulted in the banks seeing some improvement in their liquidity.

The banks want more such buybacks for augmenting their resources for meeting credit demand. The bankers said deposit growth was still far short of targets. Deposit growth was still only about 23 per cent as against the credit growth rate of 30 per cent. As a result most banks were still operating at incremental credit deposit ratios in excess of 100 per cent.

Besides, most of the deposit accretions were short-term in nature. Substantial components of these deposits comprised volatile bulk deposits. Accordingly, such bulk deposit accretions posed the risk of asset liability mismatches, the bankers said. The redemption of SDLs by Rajasthan and Orissa had opened an avenue of raising zero-risk resources, for the banks.

Bankers said they would prefer more such buybacks, especially in some of the older categories of securities. Some of these securities comprised part of the held-to-maturity category of securities. Such resources were also free from reserve ratios. Consequently, some banks hoped to overcome such mismatches through SDL redemptions.

Many States are now flush with funds from increased tax receipts and central transfers. Accordingly, bankers said, the utilisation of the resources for debt redemption would help the States cut their interest costs and help fiscal correction efforts. Moreover, with yields on the rise, and credit offtake high, many banks were agreeable to premature redemptions at cost basis.

In 2003, when the RBI had initiated debt redemption for State governments, banks had opposed it in view of the soft yield regime. At last month's auction of SDLs, the weighted average yield for seven States was 8.3 per cent. Four years ago, SDLs were priced under 6 per cent.

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