Debt Brokers Chop Staff As Volumes Dwindle

Debt brokerage houses are on a downsizing spree following the loss of business from cooperative banks, which account for a sizeable chunk of daily volumes. Following the government securities scam that rocked the gilts market early this month, the Reserve Bank of India (RBI) and the state government issued directives banning brokers' involvement with cooperative banks and entities that fall under the purview of the central bank.

Last year, brokerage houses recruited in large numbers, eyeing the potential volumes that would come about as cooperative banks shifted their statutory liquidity ratio deposits from large-sized cooperative banks to invest in government papers.

 

The RBI has barred entities under its purview to deal with brokers as counterparties, while the government of Maharashtra has taken one step further, disallowing cooperative banks to deal with brokers as intermediaries.

Recruits taken on last year have been the first to be axed. Said a fund manager: "Brokerage houses last year were building an income stream and not building a business as they clued onto the cooperative band-wagon". Many had established their presence in small towns to cater to the demand of cooperative banks.

Cooperative banks account of 10 per cent of volumes in the wholesale debt market (WDM), and a sizeable quantity in the non-WDM segment. Said some brokers: "At the time when daily market volumes were in the region of Rs 5,000 crore, cooperative banks accounted for Rs 500-1,000 crore on a daily basis". This was the potential brokerage houses were eyeing.

"Even without the scam, we were losing money as prices are falling. In the last two to three auctions, the cut-off yield was higher than the expectation level," said a market dealer. Banks are facing no better deals as prices of securities bought earlier have dropped slightly, making it difficult for them to offload their positions.

Added to the poor market sentiment, the scam resulted in market participants such as mutual funds, banks, pressing the panic button and only willing to deal with each other. "The over-reaction by the central bank has restricted the operations of the market participants, mainly brokers," said an official from a leading brokerage house.

The pipeline for gilts has been choked as the market has come to a near-about standstill with daily volumes of Rs 1,500 to 2,000 crore. Brokers cannot deal with any entity other than provident funds, insurance companies and charitable trusts. At the same time, as they cannot buy from the market, they have limited paper to distribute.