Crisil Sees Impact On Primary Dealers

The Credit Rating and Information Services Ltd (Crisil) said the withdrawal of regulatory support mechanism and hike in interest rates are likely to affect primary dealers (PDs).

"The Tier-II refinance facility for primary dealers has been already withdrawn and the Tier-I refinance is also likely to be withdrawn. This made the primary dealers very dependent on the volatile call market. The northward movement in yields since May 2000 has impacted their profitability," the rating agency said.

Meanwhile, PDs have welcome the newly introduced 'switch facility' by the Reserve Bank of India (RBI). The amount swapped on Thursday was in the range Rs 300-400 crore.

 

The newly facility will provide the primary dealers an exit route from the illiquid situation they are stuck with at present. It will bring down their provisioning requirement on account of higher yield to maturity (YTM) of their portfolio at the year end.

The RBI has provided the primary dealers the option of swapping three long-dated papers --- 12.29 per cent 2010, 12.25 per cent 2010 and 10.70 per cent 2020 -- with two 364-day treasury bills maturing on June 15, 2001 (10.75 per cent) and June 28, 2001 (10.80 per cent) which are on the sale list at the central bank's open market window.

M R Ramesh, managing director, Discount and Finance House of India, said, "The move will help the dealers to turn their portfolio more liquid," adding "the only complaint of dealers against this move is the price offered as the dealers have to book losses."

According to Ramesh, the RBI's move is in response to the dealer's demand.

A vice-president of Kotak Mahindra Capital said, "the new facility is a welcome move for the large dealers and they are expected to take the advantage of it to a great extent as the sentiment in the government security market is still bearish."

However, a section of the market believes that the individual moves of the primary dealers depend upon the management of the concerned PD. "Whether they want to book loss now or later depends upon the nature of the portfolio and what the management decides," said the treasury head of a large primary dealer.

However, dealers are sceptical whether the move will help in calming down the call rates substantially. The treasury head of a primary dealer said, "the maximum possible amount that can be swapped is not large enough to push the bullish sentiment in the call market down."

Another dealer said, "Call rates depend upon the cut-off rates offered in the daily repo auction and that is not likely to come down in the near future as the forex market is still volatile." However, some marginal respite will be there, he said.