Mopping up dollars at high cost

By C. R. L. Narasimhan

The India Millennium Deposits (IMD) Scheme operated by State Bank of India and targeted at the overseas Indians is now under way. Aiming for a collection target of at least $2 billion, the IMDs have become as controversial as the Resurgent India Bonds (RIBs) of August 1998 from which they derive all their characteristics. The RIBs collected $4.17 billion and were hailed as a stupendous marketing success. Valid criticism relating to their high cost, the areas where these could be deployed, the almost certain exchange rate fluctuation risk and many more were brushed aside.

The RIBs have completed two years and have almost three more years to go. After claiming such success SBI and the Government have not been quite forthcoming on the contentious issues.

How have the high cost funds been deployed and where? What has been the extent of loss arising out the rupee's depreciation against the dollar? And many more.

Surely at the time of another identical fund raising exercise those questions become especially relevant and topical. By most yardsticks the IMD has fewer points in its favour. The oil shock and its effect on the country's reserves are cited as the prime reason for the IMD while the sanctions in the wake of the Pokhran blast had led to the RIB.

In the two years since the RIB issue there has been a marked improvement in the external sector. The IMD will add to the reserves but that in all probability will be its only positive contribution.

On the contrary, it sends out several wrong signals. The Government's insistence on the issue is a poor reflection on the autonomy status of India's biggest commercial bank. Does SBI derive any specific advantages from the funds mop up beyond the all-too familiar hype?

The RBI is the dominant shareholder of SBI. The Government-RBI- SBI equation has to be redefined in the reform era. SBI has other shareholders too.

The Government says that in the next round of financial sector reform, RBI's stake will be brought down to below 50 per cent. Will the Government continue to have its way in future RIB/IMD type issues ?

The RIB's marketing strategy came in for praise. The results achieved in terms of volumes apparently justified the means. Not many in SBI or Government seemed to be overtly concerned that the RIB's success merely proved that it offered above the market rates. In fact considering the short duration within which the IMD has arrived ,these types of offerings - high cost and all - might well become a regular feature. Curiously this time senior SBI officials say that the IMD is in direct response to non- residents' needs.

Could not those needs have been met through improvements and better customer service in the existing non resident deposit schemes that commercial banks in India have been operating? And why should the domestic depositor not have his minimum needs - a reasonable yield on bank deposits for instance - met when the non-residents are pampered?

These questions have been asked many times. Nobody in position has answers. The misleading sales pitch continues. SBI has to undertake the unenviable task of ``defending'' the issue to the domestic audience while simultaneously enticing the overseas investor. In the former task it clearly falters. Opaque calculations and inappropriate comparisons to sell the IMD belittle the status of the country's number one bank. For instance, the yield on IMD has been compared to the benchmark LIBOR rates. The latter everyone knows is a floating rate, meaning that it will change after three or six months. The IMD like the RIB carries a fixed rate (8.50 per cent for the dollar leg). It is therefore necessary to compare yields from similar instruments such as a five year U.S. Treasury paper. It will be of no comfort to know that both the RIB and the IMD are priced at a high 3.15 per cent above the comparable U.S. treasury.

The spread which SBI and the other banks will earn in deploying the rupee funds from the IMD is a matter of conjecture. But to say that they will get a clear five per cent spread by funding infrastructure and other ``critical'' projects is irresponsible.

There are not that many infrastructure projects that are waiting to be so financed. Besides, the rupee cost of the IMD funds is not expected to be below 10 per cent even conceding that the Government is bearing most of the exchange risk.

An interest rate of 15 per cent on long-gestation infrastructure projects is simply not on. Moreover, how will a five year IMD fund a 15 year project without the project incurring what is known as the mismatch risk?

Over enthusiasm in promoting a scheme thrust on them? Or simply a desire to get into the record books? We may never get the answers from SBI or the Government.

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