Date:15/03/2007 URL: http://www.thehindubusinessline.com/2007/03/15/stories/2007031503470600.htm

Back LIC's yield expectations hurt bank bond issues

C. Shivkumar

Banks in need of capital to support non-credit growth

Bangalore March 13 Banks' attempts to raise capital by way of upper Tier II bond issues is faced with mounting adversity with the Life Insurance Corporation's (LIC) high yield expectations.

High level banking sources said that LIC's yield expectations for upper Tier II bonds were close to 10 per cent. This was after the placement of State Bank of India's Rs 1,000-crore upper tier bond issue at 9.38 per cent in November last year.

Bankers said this high pricing had now become a benchmark for LIC. As a result, smaller issuers such as the public sector-owned Bank of Maharashtra (BoM) and State Bank of Saurashtra have now been pushed to offer high coupons on their respective issues.

BoM's issue is priced at 9.9 per cent for a tenure of 15 years. State Bank of Saurashtra's issue for 111 months is priced at 9.8 per cent.

Bankers said that the issues were targeted at the life insurers, in particular LIC. The corporation is currently flush with cash as a result of large coupons and redemption flows from government and corporate debt.

The high costs notwithstanding the sources said, banks were left with few alternatives, as they would still need the funds. The growth in non-food credit has been at an annual clip of 30 per cent. Although growth in the personal and retail credit segments have slowed, farm credit offtake has more than offset the deceleration.

Cross border funds

Consequently, the number of banks looking for private placement of bonds with LIC is growing. This situation has left LIC in a dominant position to determine liquidity price. This is also because, some of the banks are wary of tapping cross border funds for meeting their capital requirements.

Only Canara Bank, SBI and some private sector banks have tapped foreign currency resources for meeting their capital requirements, at considerably lower costs than what is available in the domestic markets. Canara Bank, for instance, had raised funds at a spread of 125 basis points over LIBOR (London Inter Bank offered Rate).

Cross border funds are prepared to provide long-term capital resources at competitive rates, bankers said. In fact some of the foreign banks themselves have invested in bank bonds. However, PSU bankers are reluctant to access these funds.

They said availing such funds made sense only if they had large international operations. Barring some of the large banks, most banks are entirely dependent on domestic banking operations. Besides, there is also the exchange rate risk. Although the rupee has remained fairly stable against the dollar, there is still the downside risk element attached to cross border resources, they added.

On the other hand, few such risks are attached to resources raised from institutions such as life insurance companies and provident funds, the bankers said. Besides, despite the high costs of attracting capital, the weighted average cost of working funds would still remain low at about 5.5 per cent, since at least 40 per cent of their resources comprise current and savings accounts.