RBI sees red over bank loans to aid sell-offs

Written by Sunny Verma | New Delhi | Updated: Jan 23 2012, 08:28am hrs
The Reserve Bank of India (RBI) has opposed a government plan under which public sector banks will lend money to a new asset management company (AMC), which, in turn, will buy stakes in state-owned enterprises to support the faltering disinvestment programme.

According to sources, the central bank has rejected this proposal as it would expose banks to undue market risk and violate capital market exposure limits on banks set by the central bank.

As per the finance ministry proposal, the AMC is to be created by transferring government ownership in three companies L&T, ITC and Axis Bank held through Special Undertaking of UTI, (SUUTI) valued roughly at R32,000 crore. The AMC will then borrow from banks on the strength of these underlying assets and invest borrowed funds in PSUs being disinvested.

The central bank rules do not allow a banks capital markets exposure which includes loans against shares exceeding 40%. It could also possibly result in banks overshooting their single borrower exposure limits.

The finance ministry, on its part, has asked RBI to give an exemption from the capital market exposure ceiling for the lending banks in this particular case, the sources said. The central bank can give a relaxation for banks financing acquisition of PSU shares during disinvestment, a government source said. The RBI typically considers such relaxation proposals on a case-to-case basis.

Another option for RBI could be exempting banks lending to the proposed AMC as exposure towards capital markets, the sources said. Currently, RBI exempts banks investment in equity, convertible bonds & convertible debentures of 11 companies from the capital market exposure ceiling. These exempted firms include NHB, Sidbi, Nabard, IFCI, LIC and GIC, among others.

The source mentioned earlier said the central bank views this proposal as going largely against the prudential norms, exposing banks to significant market risk.

In case a bank lends to the AMC against its underlying assets held as collateral, it would be required to mark these assets to market at least on a weekly basis as per RBI rules. Besides, there is the issue of how the AMC would service its interest cost on the borrowed money, especially since it is unlikely to have any regular cash flows except the annual dividend received from its underlying assets.

Another likely problem is the taxation of such a structure, as existing tax laws Section 14 (A) of the Income Tax Act do not allow for deduction of interest costs in such a case. There will be disallowance for such interest cost at the time of the AMC filing its annual tax return. It could become an inefficient structure from the tax point of view, unless the government grants any specific exemption, another source said. The finance ministry has mooted this proposal to push through the disinvestment programme, which has been jeopardised by the falling stock market, bearish investor sentiment and persistent economic gloom in the global economy.

The government has so far raised a little over R1,100 crore as against the R40,000 crore targetted through disinvestment in the fiscal year ending March 31, 2012.