Fis Want To Tap Bank Funds Via 12-13% Special Bonds

The convulsions sparked by the spate of interest rate cuts have sharpened the fault lines in the financial sector.

Business Standard Correspondents assess the impact in various areas.

Financial institutions have sought the governments permission to devise special bonds for raising funds from banks. They have also requested the government to exempt banks from statutory liquidity ratio and cash reserve ratio impositions on their investments in bonds of financial institutions.

If SLR and CRR are removed on investments by banks in institutional bonds, we will be able to raise money from them at 12.5 to 13 per cent. This will help FIs to lend at lower rates, said a senior executive of Industrial Finance Corporation of India. Removal of SLR and CRR will improve the yield on this instrument to about 14 per cent. Banks will have no objection in buying this special bond because the coupon rate of all bonds of financial institutions is expected to drop to 14 per cent.

FIs have made the request on the ground that the recently announced slack season credit policy of Reserve Bank has given banks an edge over the institutions in terms of the cost of funds.

The cost of funds in the banking sector is now 10 to 10.5 per cent, following RBIs decision to reduce the interest rate on deposits below one year by one percentage point and to remove SLR and CRR on inter-bank deposits.

FIs feel that banks will be happy to park their funds on a long-term basis of three to five years with around 13 per cent interest. Most banks do not have the expertise to appraise long-term projects and are extremely risk-averse. They will prefer to park funds with institutions as long as their spreads are protected, said a source in the Industrial Development Bank of India. If the request is accepted, the difference in the cost of funds for banks and institutions will narrow down. FIs have been raising funds through the private placement route at around 15.5 per cent and through public issues at 16.5 per cent which is about 5 per cent less than the costs paid by banks for raising funds through deposits.

The request for this special instrument comes at a time when the finance ministry has been deliberating on the advisability of allowing FIs to raise a larger quantum of funds through short-term deposits. At present, FIs are allowed to raise deposits for a minimum period of three years.