SBI, RBI set wheels moving on $7 bn IMD repayment

The State Bank of India (SBI) and the Reserve Bank of India (RBI) preparing to ensure smooth payment of the India Millennium Development (IMD) bonds.

The RBI had called a meeting of the SBI and other foreign banks who had participated in the issue to take a stock of the repayment preparations.

"The idea is to fulfill the payment obligations without causing undue volatility in the market, said a banking source.

"The best part of the IMD has been the exchange rate gain both for the State Bank and for the government," said the source.

He said, when the IMD was issued, the spot rupee dollar exchange rate was at 46.50 and it was agreed that the SBI will take up a maximum of one percentage of the exchange rate risk, in case the spot rupee loses further during the float period of five years.

The rest will be borne by the government as per the agreement. However the spot rate has appreciated to 43.70/90 per dollar now.

While the RBI has already started doing short-term swaps to collect the required dollars so as not to disturb the market, it is also learnt that the bank has kept the option open to use foreign exchange reserves if need be.

The RBI will have to give the dollars to the SBI in turn for the equivalent rupee funds.

While the SBI has already invested in five-year fixed tenor instruments right from 2000, it has also increased treasury activity to ensure rupee funds.

The SBI has started shifting its near-term investments to those maturing in 2005, added banking sources.

This includes taking a position in government securities, commercial paper, treasury bills, and corporate and infrastructure bonds.

The IMD bonds were issued in 2000 to raise overseas funds and the total principal amount collected was $5 billion. Over the five year tenor of the bonds, including the interest which was 7.75 per cent in dollar terms, the total liability at present hovers above $7 billion.

The bonds are maturing in December 29,2005. The IMD was a very high cost borrowing for the Government of India.

This is because when the US interest rate for 5-year treasury bonds were fetching 4.95 per cent, the IMD offered 7.75 per cent for five years.

During the subsequent years, the US treasury yields fell further to 2.25 per cent for five-year paper.

Part of the funds will be returned to the SBI by foreign banks who were co-arrangers to the issue. These banks raised almost half of the total amount mobilised.

A portion of the money mobilised was given to the foreign banks for on-lending purposes, which now will be returned to the SBI.

The SBI had lent the funds to these banks at 10 per cent, whereas the banks have already earned 3-5 per cent margin on these funds through onlending, said a banking source.