Loans Against Us-64 Come At A Big Discount

Banks are extending loans against Unit Trust of India's US-64 scheme at a steep discount to the unit's face value of Rs 10. This is besides the minimum 40 per cent margin at which the loans are being given.

Bank of India is offering loans against US-64 pegging the face value at Rs 5. In other words, offering a US-64 unit, carrying a face value of Rs 10, as collateral, an investor can get a loan of Rs 3 only.

The State Bank of India (SBI) today announced that it will continue to provide loans against units of the troubled US-64 scheme at its face value of Rs 10 per unit. It will take a margin of 40 per cent.

Dena Bank has decided to freeze extending loans against the security of the units. "We are reviewing the situation as the sale and repurchase of units have been frozen for six months," according to a bank official.

Adding to the banks' dilemma on extending loans against US-64 units is the fact that the current repurchase price or net asset value are not known due to the freeze on sale and repurchase of the units.

Therefore, most of the banks have adopted a wait-and-watch policy on extending loans against the US-64 collateral. "Assuming that its NAV is hovering at Rs 7, we are giving loans by pegging the unit value at Rs 5 after taking sufficient margins," said a Bank of India official.

UTI Bank, too, is offering loans against units of US-64. It has an outstanding of around Rs 1.30 crore on the US -64 scheme. "As of now we are valuing the units at par (Rs 10). Earlier, we used to give the loans taking into consideration the repurchase price. We are charging margins of 40 per cent on the units," said a UTI Bank official.

Other private sector banks are reviewing the situation. However the major problem which these banks are facing is the issue of pricing. "We are watching the situation. We do not intend to take any exposure in the scheme until we know the finer details of the scheme -- whether it is on the repurchase price or on the NAV," says a private sector bank official.

Some of the banks which had earlier extended loans against the scheme are also keeping a close watch on any possible depreciation in the repurchase price. However, according to observers there would be very few people who would be interested in taking a loan against mutual funds.

"The returns of mutual funds is not more than the cost of loan (around 15 -16 per cent). Theoretically shares give higher returns and it is more beneficial to take a loan against share. The quantum of loans taken against mutual funds would be only at a minuscule percentage of the total loan against shares," adds a senior banker.