State development loans emerge banks, insurance firms’ favourite

Jun 25 2014, 01:31 IST
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SummaryWith the supply of corporate bonds currently thin, state development loans are being bought by banks and life insurance companies as they offer a higher annualised yield.

With the supply of corporate bonds currently thin, state development loans are being bought by banks and life insurance companies as they offer a higher annualised yield. The annualised yield on state bonds, auctioned by Reserve Bank of India (RBI) on Tuesday was an effective 9.24%. Given that Reliance Jio had, earlier this month, raised R2,500 crore via private placement of bonds at 9.25% with a maturity of 10 years, the yield on the state loans should have been about 25 basis points lower.

“Sovereign state loans right now are giving a higher yield than corporate bonds of the same maturity which is an abnormality,” Arvind Konar, the head of fixed income at Almondz Global Securities pointed out. He noted that normally the difference on yield between government securities, state development loans and corporate bonds is about 30 bps each. However, yields on corporate bonds have contracted as there isn’t enough supply, Konar explained.

RBI on Tuesday concluded an auction for state development loans for 12 states with an aggregate amount of R7,130 crore, with an average yield of 8.99% half-yearly for a tenure of 10 years. The total subscription was Rs 6,130 crore.

NS Venkatesh, the executive director and head of treasury at IDBI Bank, points out the yield on 10-year gilts is 8.7% while the state development loans offer 25 bps more, so it makes an attractive investment for banks if they have space in the held-to-maturity category. “There are no new issuances from corporate bonds following changes in the companies Act, so banks will opt for this,” he said.

“The state development loans will find favour with a number of insurance companies that need to fill their quota. Generally, they would like to hold them to maturity,” said Lakshmi Iyer, chief investment officer at Kotak Mahindra Asset Management. They would be an attractive investment for banks as the investment since they are eligible to be part of the Statutory Liquidity Ratio, Iyer added.

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