Psu Bond Deals By Banks To Be Allowed

Commercial banks had approached the Reserve Bank seeking a withdrawal of the ban.

The ban had been imposed sometime ago when the apex bank sent a letter to State Bank of India stating that banks would not be allowed to buy PSU bonds in the secondary market.

The Reserve Bank has told treasury heads of commercial banks that the ban on PSU bond trading will be withdrawn. The formal communication will reach banks in the near future, it is pointed out. However, interestingly, many banks have yet to receive the circular banning the purchase of PSU bonds in the secondary market.

Says a treasury head of a private sector bank, "In view of the fact that many of the banks have not received the circular banning the secondary market activities in PSU bonds, the trading continues unhampered. If we have not been served a letter to stop trading why should we."

Officials of commercial banks prevailed on the RBI that the ban will deal a severe blow to trading in the secondary market, which was already at a low ebb. It was pointed out that commercial banks are major traders in PSU bonds and the ban will mean that trading will come to a standstill.

The Reserve Bank felt that the ban would also cripple the primary market for PSU bonds. A total of 148 PSUs are planning to raise Rs 10,235.48 crore through the debt market in 1996-97. Commercial banks were planning not to subscribe to these bond issues if the secondary market trading ban continued as they would not have any exit route. This also prompted Reserve Bank to withdraw the ban.

Reserve Bank had affected the ban in a bid to curb speculation in PSU bonds. Banks generally buy bonds in the secondary market for trading purposes. However, the ban was a reversal of the financial sector reforms aiming to create a vibrant long-term debt market. In fact, most of the loans coming from multilateral institutions has a conditionality that the long-term debt market in the country would be developed. The ban was in variance with this stipulation.

Banks are happy that the ban is being withdrawn. PSU bonds give yields well over 20 per cent, leaving a net spread of over seven per cent. Unlike loans, these assets are tradable and PSU bonds are considered less of a risk than corporate bonds.