SBI raising costly money for IMDs

One-year funds being raised at 7% via CDs.

The State Bank of India group is leaving no stone unturned to raise money from the market for redemption of India millennium deposits (IMDs) next week.

The country's largest commercial bank and its associates are raising one-year money at 7 per cent through on-tap certificate of deposits (CDs) to counter the redemption pressure of Rs 33,000 crore worth of IMDs.

This is two percentage points higher than the cost of one-year deposits which is now pegged at around 5 per cent. A short-term one-year loan to a triple-A rated corporation fetches about 6.50 per cent.

Six of the 7 associate banks of SBI have already raised CDs worth about Rs 2,500 crore to meet their cash requirements. Besides, SBI itself is in the market raising resources.

Sources said SBI and its arms would continue to raise funds through on-tap CDs till the IMDs were redeemed.

The bank expects about 20 per cent of the IMDs to be rolled over. In other words, it needs close to Rs 27,000 crore to pay IMD holders.

About a fortnight back, SBI had raised one-year money at 6.13 per cent. However, SBI associates were now paying about 7 per cent for one-year money as liquidity had tightened, said a market source.

This is one percentage point higher than the rate of one-year treasury bill. CDs are short- and medium-term debt instruments offered by banks.

They are issued for a period of not less than 7 days and not exceeding one year from the date of issue.

Reserve Bank of India (RBI) Governor YV Reddy had last week hinted at a liquidity squeeze on account of IMD redemption. The RBI has injected liquidity of around Rs 8,000 crore since Monday through its repo window at 6.25 per cent. The overnight inter-bank call money rate has also gone up to 6.25 per cent in sync with the RBI's repo rate.

The RBI has also cancelled treasury bill auctions aggregating Rs 15,000 crore under the market stabilisation scheme (MSS) to prevent further squeeze in liquidity. Senior bankers said the RBI would cancel two more MSS auctions slated to take place on December 23 and December 30 to counter balance the IMD outflow.

The IMDs were mobilised by SBI in November 2000 to boost the country's foreign exchange reserves. The total outgo of foreign exchange on December 29 will be about $7.3 billion, including cumulative interest.

The entire foreign exchange outgo will be met by the RBI through the sale of its foreign exchange reserves to SBI which will buy foreign currency using rupee resources.