State Bank of India (SBI) will be the largest beneficiary of the Resurgent India Bonds (RIBs) scheme by raking in Rs 600 crore over the next five years, assuming an annual depreciation of five per cent in the rupee's value against the dollar, a report by J P Morgan has said.
The scheme, floated in August, mopped up $4.16 billion. Of this, an estimated $1-1.2 billion was brought in by the SBI and swapped for rupees with the RBI.
J P Morgan has put forward the assumption that $3 billion would be lent in rupees.
Hence, the total cost to SBI will be 9.25 per cent (inclusive of 7.75 per cent interest cost, 0.5 per cent commission and administrative costs, and one per cent paid to RBI towards exchange rate protection). It has pegged the annual depreciation at five per cent.
The balance $1 billion lent in dollars would cost 8.25 per cent (7.75 per cent plus 0.5 per cent administrative costs).
JP Morgan further expects that SBI would earn Rs 53.13 crore as spread from lending to collecting banks at 9.5 per cent, since its cost is 9.25 per cent.
It has further postulated that $1.67 billion would be deployed in five year government bonds at 11.75 per cent, earning a spread of 2.5 per cent without any incidence of non-performing assets (NPAs). This would bring in around Rs 887.19 crore.
But the cash reserve ratio at 11 per cent would knock out Rs 368.16 crore bringing the total down to Rs 572.16 crore.
Further, the $1 billion lent in dollars will be gradually deployed and hence, SBI may have to bear a "negative carry" in the first six months. Since the one month dollar Libor is at 5.65 per cent, the SBI will not earn more than 5.75 per cent, implying a negative spread of 2.5 per cent costing it around Rs 15.95 crore. But it may earn a spread of 0.75 per cent through lending the funds over the next four to five years, earning a profit of Rs 43.07 crore and making a net gain of Rs 27.12 crore.
According to J P Morgan, SBI will, therefore, gain around Rs 600 crore from the RIB issue over the next five years. The present value of its profit discounted by its maximum deposit rate of 11.50 per cent is Rs 348 crore.
"It is also very evident that there is a strong incentive for SBI to bring as much funds as possible into the country and lend in rupees rather than keep them overseas and lend in dollars," the firm added.
