Calcutta, March 23: The finance ministry has asked nationalised banks keen to sell off the Central government’s debts to present a concrete scheme quickly. They have also been told to specify the premium they would like to be paid on the stock of loans.
“The ministry has sent an informal communication to banks on the issue, advising them to work out their financial projections for 2003-04. This must be done keeping in mind the sell-off programme,” ministry sources said.
In the budget, finance minister Jaswant Singh said a large proportion of the bank’s holding of Central government domestic debt, contracted under the high interest regime of the past, is thinly traded.
With the softening of interest rates, ordinarily, such loans should command a premium on their face value. In reality though, banks are often unable to cash in on this opportunity because of limited liquidity.
The government announced a buy-back of such loans “entirely on a voluntary basis from banks in need of liquidity, or those interested in pocketing the premium to hedge against non-performing assets (NPAs) in a better way.
Officials say the offer to buy back high-cost government securities and linking it to NPAs will strengthen the sector, especially weak banks. These investments are made by the banks to maintain the statutory liquidity ratio.
However, the bankers are concerned over the premium that the government will offer over the face-value of these loans. “Through this offer, the government will be able to reduce high-coupon debts. But we feel that the premium will not be much. The finance ministry will ensure that the cost is not high.”
As the government prepares to buy-back high cost debt, it will have to make a choice from over Rs 4,40,560 crore of bonds which carry coupon rates in the 10-14 per cent range.
The outstanding government debt is Rs 5,65,910 crore. The difference between the two is made up of securities issued in the seventies and early eighties, and bonds re-issued by the central bank at lower interest rates.
A bulk of high cost debt matures in the next 10 years. The government needs to redeem Rs 3,25,140 crore of bonds by the calendar year 2013. Government bonds worth Rs 3,98,490 crore have residual maturity of up to 10 years. Bonds worth Rs 17,468 crore mature in 2003.
Bankers feel that re-purchasing such huge amounts of government bonds is not possible in the short term, may be spread over a long period and across various tranches.
he RBI has allowed banks to finance special purpose vehicles (SPVs) floated by companies that are interested in buying the government’s equity stake in PSUs. The SPVs must be holding firms, they cannot trade in the PSU shares purchased (except block sales) and are barred from other financial activity.