Co-op Banks Riled Over IFCI Plan To Cut Bond Rates To 6%

Mumbai, Sept 22: | Updated: Sep 23 2003, 05:30am hrs
Co-operative banks are piqued at the Industrial Finance Corporation of Indias (IFCI) proposal seeking reduction of rate on bonds they have subscribed to in the past to six per cent from 13 per cent of coupon they carry, even as the co-operative banks are reeling under their own resource constraints in the wake of competition from commercial banks.

Talks between IFCI and the co-operative banks almost reached a deadlock recently when co-operative banks refused to budge from their demand for at least 10.5 per cent of interest, which is the cost of their investment then, should be paid by the financial institution (FI) on their non-statutory liquidity ratio (non-SLR) investments.

The non-SLR investments of state and district central co-operative banks and urban co-operative banks put together crosses Rs 1,000 as on March 31, 2003, while those with over Rs one crore of investment aggregate to Rs 699.38 crore, co-operative bank sources told FE.

After a few months of confabulations the FI has increased its offer finally to nine per cent. The FI has also send the cheques to some of the co-operative banks at the offered rate, asking them to accept the new terms, the sources added. Many IFCI bonds were set to mature between 2003 and 2005.

At the first instance, IFCI has proposed to pay only six per cent on non-SLR liabilities and to extend the maturity period by 10 to 20 years. Even the interest payments due half-yearly and annually are not yet paid, the sources said.

However, the co-operative banks did not even agree to discuss the issue of extending the maturity of the bonds at lower rate of interest and at zero coupon. The FI offered to pay six per cent interest on 50 per cent of the investments till maturity while for the remaining amount the co-operative banks were asked to agree for zero-coupon, the sources added.

IFCI has cited asset-liability mismatch due to bunching of maturities of several bonds under rupee as well as foreign currency deposits raised by it. Though they had admitted to have contracted these bonds with an interest rate in the range of 11-13.5 per cent, in the wake of falling interest the FI asked the co-operative banks.

The beleaguered FI also said that the restructuring of liabilities was being done as per the recommendations of global consultants McKinsey & Co, which has advised the FI on its restructuring in the wake of mounting non-performing assets, sources added.