 "UDAY bonds to be privately placed, RBI clarifies")
Bonds issued under Discom package UDAY will not hit the market, but would be private placements, a Reserve Bank of India (RBI) spokesperson clarified today, extending a big relief to the bond market that is seeing bond yields hardening with every passing day.
Additionally, the central bank is open to give further relaxations on these bonds, like allowing them to be ‘held till maturity’ so that the investors do not have to incur mark-to-market losses every quarter in valuing them in their books.
The bonds, to be issued by the electricity distribution companies (discoms) as non-SLR grade, but highly-rated papers, have been a major concern for the bond market and have pushed the yields of the state development loans at auctions.
About Rs 60,000 crore of UDAY bonds are expected to be issued this fiscal i.e. within a month ending March, and an additional bond issue of Rs 30-40,000 crore is scheduled for the next fiscal year.
Under the UDAY scheme, state governments assume charge of the debts of their respective discom and will issue bonds to banks for the 75% of the debt. For the rest 25%,
the discoms directly deal with the lenders for the repayment, either issuing bonds in the market or keeping the due as pure debt. It was expected that the discoms will hit the market with their non-SLR grade bonds to give money back to the banks.
Even as non-SLR, these bonds are highly-rated and would compete with other high quality papers of the central and state governments to attract the investors.
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The total exposure of banks to discoms is about Rs 4 lakh crore, depending upon how many states accept the UDAY scheme, bonds worth Rs 1 lakh crore would have to be come to the market by fiscal 2016 and fiscal 2017.
The glut of supply in bonds has pushed up bond yields across central and state government securities. On last Tuesday’s bond state development loans auctions, the cut off for West Bengal came at 8.88%, which was more than 200 basis points over policy repo rate and more than 100 basis points over the equivalent maturity benchmark government security. The auction cut off pushed up the government bond yields too.
As the government approaches its Budget, where the borrowing programme is expected to be at a record Rs 6,80,000 crore by the market, hardening yields make the borrowing cost steep for the government. Besides, the hardening yields pushes up borrowing cost for the Indian private sector as well, pointed out India Ratings and Research.
A private placement of bonds, help aid the issue as the bonds would not hit the market and distort the bond yields further.