Ibpcs Find Favour With Banks

Inter-bank participation certificate (IBPC)a money market instrument has sparked to life following banks rushing to meet their financial year-end priority sector lending target.

Except for a few banks such as ICICI Bank, which has parked Rs 90 crore with National Agricultural Bank for Rural Development (Nabard) and Small Industries Development Bank of India (Sidbi), most of the newly set up private banks and the foreign ones are meeting their priority sector lending targets through the IBPC route.

According to the Reserve Bank guidelines, banks have to lend 40 per cent of their total credit disbursements to priority sector or invest in priority sector bonds.

 

Further, banks are required to park 50 per cent of their shortfall in priority sector lending with Sidbi and Nabard or invest in the bonds issued by these institutions. Foreign banks and the new private sector banks, in order to cover their shortfall in priority sector lending target, have scurried for cover by purchasing these instruments from nationalised banks, whose priority sector lending portfolios have been far in excess of the Reserve Bank stipulation.

These banks have not opted for the priority sector bonds issued by Nabard and Sidbi as funds are locked in for 3 to 4 years and the paper yields a return of 8 per cent.

IBPCs, on the other hand, guarantee a return of 8 to 9 per cent and have a tenure of only 90 days.

This assures liquidity to the investor from the short-term perspective.

An added advantage to banks picking up IBPCs is that the assets they invest in are standard assets which are not classified as non-performing in nature for two consecutive quarters.

This makes the instrument virtually risk-free for the bank buying IBPC.

However, with these banks preferring the IBPC route instead of picking up priority bonds, Nabard and Sidbi deposits have taken a severe beating in the current financial year.

We have only received Rs 200 crore and Rs 127 crore from private banks and foreign banks respectively this year.

This is substantially lower than what we received in the previous financial year, a senior Sidbi official told Business Standard.

The official attributed the drop in deposits to the preference for the inter-bank participation certificates by the foreign and private banks.

Since we do not have branches in the rural areas, we are unable to meet our priority sector lending targets and so we are forced to pick up IBPCs, said a treasury official with a south-based private bank.