PDs gilt stricken as secondary mart sleeps

Primary dealers (PDs) are stuck with government securities worth Rs 3,000 crore picked up from primary auctions as banks have not been active lately in the secondary government securities market.

Volumes in the secondary government securities market have fallen to Rs 1,000-2,000 crore since the beginning of the new fiscal. Even the ten-year benchmark 7.38 per cent 2015 paper, the most liquid one, has turned illiquid with yields rising to 7.13 per cent as against 6.93/ 95 per cent during the end of the last fiscal.

The trading in gilts has been confined to primary dealers and brokers with few papers such as 6.85 per cent 2012 and 8.07 per cent 2017 getting attention. This has been the situation since the beginning of the government borrowing programme for the new fiscal, beginning April.

Even in primary auctions, few public sector banks have participated and have offloaded the stock at a discount.

According to banking sources, this has been a major concern for the Reserve Bank of India (RBI) as the government borrowing programme has just made its beginning for the new fiscal.

While banks have been reluctant players, primary dealers with lower capital base do not have the capacity to sustain gilts auctions on their own.

The concern has been further aggravated as RBI's role as the merchant banker to the government ensuring the success of the government's public borrowing programme will cease to exist post 2006 following the Fiscal Responsibility & Business Management Act (FRBM).

According to a banker, a new fiscal is usually marked with brisk trade in gilts as the securities are available at lower prices and will help in capital appreciation by the year-end.

Banks complain of low appetite for gilts as they are stuck with excess securities holding of 40 per cent as against the requirement of 25 per cent.

According to a public sector bank dealer, this is the case even after transferring securities maintained under the mandatory statutory liquidity requirement to non-trading categories.

Primary dealers, already stressed, have asked the RBI for certain changes in business norms for them. PDs want the RBI to relax norms for setting up dealership. At present, a PD could be set up as a separate subsidiary with RBI permission.

Some of the bank-promoted primary dealers have sought the apex bank's nod to merge with the promoter bank and carry on primary dealership as a division, said a primary dealer.

Primary dealers are the only entities, besides banks, who can participate in the primary auctions of the government papers floated for the borrowing programme.

Each PD has a bidding commitment in the auction and has to underwrite the auction if it fails to get fully subscribed.