The Hindu : Centre announces debt swap scheme for banks

Online edition of India's National Newspaper
Saturday, May 03, 2003

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Centre announces debt swap scheme for banks

By Our Special Correspondent

MUMBAI MAY 2. The Government has proposed to buy back 24 illiquid Government of India Securities (G-Sec) with a total face value of Rs. 80,000 crores from banks and public sector financial institutions.

Though the buyback operation is tentatively fixed in the first quarter of the current financial year, the first transaction is likely to happen at the end of June and the buy back will be done through price based auction, said the Union Finance Secretary, S. Narayan, here today after meeting chiefs of banks and financial institutions. There may be one or more tranches of the buyback operations depending on response.

This programme will reduce the interest burden for the Central Government. "It is completely a voluntary programme

and has been well received,'' said Mr. Narayan, adding, "this will be a transparent screen-based auction.'' However, at the end of this programme the Government will go for a cost benefit analysis to decide whether to repeat this programme.

This scheme, which was announced in the Union Budget 2003-04, would help banks improve their balance sheets and make provisions for non-performing assets (NPAs). According to Mr. Narayan, these entities would also get tax benefits to the extent they make such provisions.

The premium amount pay out will be added to the fiscal deficit of the Union Government. This will lead to additional borrowing by the Government unless revenue increases or expenditure decreases.

The premium amount is estimated to be between Rs. 3,000 crores to Rs. 6,000 crores.

The new securities that will be offered in lieu of securities bought back will be fixed rate securities with a predetermined coupon. The coupon will be based on yields prevailing at the time of notification of auction. The maturities of the new issues will be 5, 10, 15 and 20 years, tentatively, subject to modifications based on participant response.

PTI reports:

Mr. Narayan said the auction amount would depend on the feedback from the banks and FIs. According to banking sources, State Bank of India's portfolio in these 24 illiquid G-secs offered by the Government to buyback amounts to Rs. 5,000 crores.

The portfolios of some of the other banks were: Punjab National Bank Rs. 1,800 crores, Canara Bank Rs. 1,900 crores, Bank of India Rs. 1,000 crores, Bank of Maharashtra Rs. 2,000 crores, Bank of Baroda Rs. 1,100 crores, Central Bank of India Rs. 225 crores, Dena Bank Rs. 340 crores, UCO Bank Rs. 470 crores and Indian Bank Rs. 410 crores, the sources said.

The Corporation Bank Chairman and Managing Director, Cherian Varghese, said the buyback was a good idea, especially with the introduction of 90-day norm for categorising the dues as non-performing assets (NPAs).

"We will obviously not offer the whole portfolio in the first tranche,'' he added.

The Bank of Baroda Chairman and Managing Director, P. S. Shenoy, said they would participate in the buyback and expects to offer G-secs aggregating Rs. 700-800 crores.

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