Calcutta, May 15: The government will start buying back government securities (gilts) from public sector banks in late June, RBI deputy governor Rakesh Mohan said.
“We would like to do it (buy-back of gilts), as proposed by finance minister in the budget, by the end of June through a screen-based trading,” Mohan told newspersons today after attending a meeting of the central board of the Reserve Bank.
He said the process was being delayed because new software was necessary to conduct transparent screen-based auction on a real time basis.
Mohan said the initiative would help banks to improve their balance sheet.
The budget had stated that a large proportion of banks’ holding of central government domestic debt, contracted under the high interest regime of the past, is thinly traded. With the softening of interest rates, such loans should command a premium over their face value. In effect though, banks often cannot encash this because of limited liquidity.
Under the proposed scheme, the government is ready to buy back such loans from banks in need of cash or to adjust the premium on such loans against their non-performing assets (NPA).
It was decided at a meeting between the RBI, the government and bankers that the buyback of loans would done through an auction and would be absolutely voluntary for banks.
“So banks can have a say in determining the premium. Bids would be on premium rate because if the buy-back is at the market premium, then there is no gain to government,” he said.
Mohan said the government is going to buy back only if there is some discount at the auction. “Whatever premium is given would be in cash and that would add to the fiscal deficit.”
If banks use the premium received to make provisions for their NPAs, they would be allowed additional income tax benefits.
On whether banks that are doing well would be willing to sell gilts at a discount, Mohan said, “A good bank may be willing to strengthen its balance sheet. Moreover, the banks will get a tax benefit.”