Banks told to rejig non-SLR bond kitty

The Reserve Bank of India (RBI) has asked nine banks, including the State Bank of India and Punjab National Bank, to transfer their investments in non-SLR (statutory liquidity ratio) bonds issued by the development finance institution, IFCI, to available-for-sale (AFS) category from held-to-maturity (HTM) by the end of June 2007. The profits of these banks could be hit by around Rs 700 crore as they will now have to provide for depreciation in the value of these bonds.

When the IFCI debt restructuring exercise was undertaken in 2002-03, the central bank had allowed banks to hold non-SLR bonds issued by IFCI in the HTM category to avoid mark-to-market losses. However, in May 2007, the central bank told the banks to transfer their exposure in the non-SLR bonds and debentures to the AFS category. According to RBI guidelines, only SLR bonds can be held in HTM category.

Bank of Baroda, Corporation Bank, Central Bank of India, Punjab and Sindh Bank, Indian Bank, UCO Bank and Oriental Bank of Commerce hold the IFCI non-SLR bonds. The Corporation Bank and Bank of Baroda have already transferred their bond investments to AFS category.

"The Reserve Bank of India had given a special concession to banks when the debt of IFCI was restructured, under instructions from the government. The RBI now wants to withdraw the special consideration, since time has lapsed and IFCI's repayment capacity has increased,' said a senior official of a large public sector bank.

The banks' non-SLR exposure to IFCI stands at around Rs 3528.6 crore, payable in 2022. Considering that current yield on the benchmark 15-year government bond is 8.5 per cent, banks are expected to take a hit of 20 per cent or Rs 700 crore on their investments.

The bankers have already booked substantial losses as the interest rates on 50 per cent of their non-SLR exposure was reduced from 12 per cent to 6 per cent at the time of restructuring. The remaining exposure was converted into zero coupon optionally convertible bonds, with a right to recompense.

Under the aegis of the Indian Banks' Association (IBA), banks have asked the RBI to allow them to continue holding these bonds in HTM as they were transferred to HTM before 2004. Prior to September 2004, banks were allowed to hold both non-SLR and SLR bonds in HTM. At the time of purchase, the banks were only required to indicate their intent to hold the security in HTM, held for trading (HFT) or AFS.

The IBA had earlier written to the government seeking a compensation for the banks to the extent of the write-offs made in 2002-03. "IFCI has made windfall gains out of cash flows and disposal of assets. The government should provide for recompensing at least a part, if not the full portion of write-offs. The matter is now being considered by the cabinet," said a senior IBA official.

After many years of being in the red, IFCI reported a net profit of Rs 898 crore in 2006-07. In the January-March quarter, the company raked in Rs 800 crore from a 7 per cent stake sale in the National Stock Exchange and about Rs 30 crore by divesting its entire stake in ICRA.