Slow buyback

BS OPINION

To do this the government had announced a buyback programme so that it can take advantage of today's low rates of interest. Like most companies that have opted for debt restructuring, the government is trying to buy back the securities that it issued when interest rates were very high.

With government paper of various maturities and tenors floating around, the buyback, it was reckoned, would reduce the government's interest payments.

However, unlike corporate debt paper, government securities issued in the past do not have a call and put option. So the government can't call back its debt.

The success of the initiative, therefore, depends on how the institutions who hold this debt, react to this move. The first indications are that the response has been lukewarm.

Perhaps aware of this, the government sweetened the deal with an offer to pay a premium, make it tax exempt and start with the most illiquid of securities.

But the banks are not biting. Of the outstanding debt of around Rs 1,00,000 crore through paper, all that has been sold by the banks and institutions to the government is a paltry Rs 15,000 crore.

With an interest burden of Rs 1,23,223 crore, a saving of Rs 1,000 crore that the government is likely to make is just 0.08 per cent of the total burden.

That is natural, for it makes little sense for those holding such paper to part with it. In today's environment, where will they be able to deploy this amount at such high rates "" between 8 and 13 per cent "" for risk-free paper?

But this also shows inertia on the part of bankers, who have got used to bulging bottom-lines at the expense of the government.

It is possible to understand their reluctance up to a point, given that the economy was going through a mini-recession and there was not much demand for money.

Now that the economy is in recovery mode, there will be need for funds. What the banks are doing is to hold on to profitable (for themselves) but unproductive (from the point of view of the economy) deployment of credit, and not start productive but less remunerative credit.

This is short-termism. Giving credit to the productive sectors will create a virtuous cycle. It also needs to be understood that the high interest burden of the government is not only the government's problem; it has sequential effects on the economy and on business.