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100 pc risk-weightage on US-64: Banks

C. Shivkumar

BANGALORE, July 19

PUBLIC sector banks have conveyed that liquidity support being made to Unit Trust of India (UTI) for meeting its redemption payments of US-64 units would be fully risk-weighted.

Bankers have said that this risk-weighting was necessary, since attempts to obtain sovereign guarantees for landings have so far not been successful, banking sources said.

Bankers added that the risk-weighting would be 100 per cent according to the existing guidelines of the RBI which provides for a capital adequacy of 9 per cent to 10 per cent next year. Relaxations in risk-weighting was also not possible. Only the develo pment financial institutions, covered under Section 4 A of the Companies Act, were entitled for relaxations in risk-weightage. For investments in FI bonds, the risk-weighting prescribed is 20 per cent.

The bankers said that 100 per cent risk-weighting would not necessarily mean high cost borrowings, since there was always an element of implicit sovereign guarantee. This was because UTI is treated as a statutory institution, since it comes under the pro visions of UTI Act. Consequently, interest rates charged to UTI are expected to be below the prime lending rates (PLRs) of the major public sector banks. The PLRs are in the region of 10.5-11 per cent.

These low rates are also on account of the markets being awash with liquidity. This liquidity overhang has already allowed some of the top corporates such as Reliance Industries and Tatas to funds at sub-PLR rates.

But the full risk-weighting would still imply that the liquidity support to UTI would be at rates at least 1.5 to 2 per cent over matching sovereign lending rates, the bankers said. With UTIs liquidity support facility expected to have anywhere between 1 82 and 364 days, the interest rates are expected to be in the region of about 9.5 per cent.

The PSB liquidity support package for UTI amounts to Rs 4,000 crore. Of this Rs 1,500 crore is in the form of a repurchase facility with the State Bank of India. The remaining is expected to partly comprise of a backstop facility for UTI and advances aga inst existing portfolio of stocks.

However, some critical issues relating to advancing the loans against shares still needed to be clarified, the bankers said. Bankers are currently averse to providing any advances on the basis of current market valuation of UTI's equity portfolio. This i s especially in an environment when the outlook for the equity markets is far from optimistic. Consequently, the values of the UTI's portfolio would have to be substantially discounted and only lendings would be fixed only on the basis of this discounted value, they added.