Rate cycle, trade losses curb primary dealer segment

A reversal in the interest rate cycle and trading losses have curbed the expansion of primary dealerships.

According to banking sources, Oriental Bank of Commerce and BNP Paribas are understood to have shelved their plans of opening up primary dealerships after securing licences.

Reliance Capital, a non-banking finance company (NBFC) that plans to become a primary dealer (PD), is also revisiting its strategy, said sources.

In the government securities market, since most of the banks have already shifted their trading portfolio to a non-trading one, there are no valuation concerns and consequently there is no major buying before the fiscal year end.

This has led to added pressure on the PDs, who are sitting on a pile of securities subscribed in the primary auction of government borrowing programme.

PDs are a financial intermediary which is being set up by the Reserve Bank of India to share the burden of government borrowing.

This is being done by ensuring that in the primary auction of the government papers floated for market borrowing, the PDs have to commit their participation as per the agreement in the licence.

This way, the once on picking up the devolvement does not fall entirely on the Indian central bank if a paper remains unsubscribed by the market players.

The PDs had earlier approached the RBI and evinced their interest in diversifying in an array of activities "" ranging from foreign exchange and credit derivatives to commodity futures. This would help them in hedging interest rate risk emanating from their fixed income portfolio.

The Reserve Bank of India (RBI) has set up a technical committee to address this issue.

The committee has submitted its report. According to banking sources, some of the PDs "" floated as an arm of banks "" have already started other investment banking activities.

The PDs feel that the RBI does not seem to be averse to the idea of allowing PDs to other areas of activities. However, a detailed appraisal of the capital , treasury skills and justification for diversifying into allied activities will need to be scrutinised.

Even if permission is given to PDs in future to carry out these activities, it will be on a case to case basis, said a source.