Relief to bond markets: Recap bonds to be non-SLR; pricing remains unclear

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Mumbai | Published: January 25, 2018 5:28:20 AM

The much-awaited recapitalisation bonds to be issued by the government will not be counted under statutory liquidity ratio (SLR) requirement and would not be tradeable, said the finance ministry on Wednesday.

relief to bond market, bond market, recapitalisation bonds, slr requirements, statutory liquidity ratioThis clarification came as a relief to the bond market. (Image: Reuters)

The much-awaited recapitalisation bonds to be issued by the government will not be counted under statutory liquidity ratio (SLR) requirement and would not be tradeable, said the finance ministry on Wednesday. This clarification came as a relief to the bond market. It has been proposed to issue Rs 80,000 crore of bonds this fiscal, as part of the total Rs 1.35 lakh-crore of recapitalisation bonds to be issued to public sector banks by the government. Had the bonds been given an SLR status, it may have impacted demand for government securities, which are eligible assets for meeting the SLR requirements – others include approved securities, gold and cash. The Reserve Bank of India requires banks to maintain an SLR of 19.5% of their net demand and time liabilities (largely, current and savings accounts and fixed deposit liabilities). The other issue market players were ceased with was the nature of the instrument and its pricing. While the finance ministry clearly stated that the bonds would have a maturity of between 10 and 15 years, it wasn’t clarified whether these bonds will carry a fixed or floating rate and what the pricing would be. Economic affairs secretary Subhash Chandra Garg clarified in a press conference that the bonds would be issued in six different slots. “The pricing would be more or less based on three month’s average plus some spread. This is cash neutral. The bonds are swapped for shares. It is an equal switch and not a public issue,” he said.

While this response to a media query provided a broad indication, whether the rate would be reset periodically and what the precise spread would be was not specified. A certain section of the market believes that the pricing would be based on a spread over the 3-month average of the corresponding government securities yield. However, others believe that the bonds could carry a floating rate. It is also not yet clear whether these bonds would be permitted under the held to maturity (HTM) category. Bankers point out that under IND-AS accounting standard, even non-SLR bonds can be considered under HTM. The central bank permits only a certain percentage of the total SLR holding to be categorised as HTM. Bonds held under the HTM category are not required to be marked-to-market, and any notional losses provisioned for.

Vijay Sharma, senior executive vice-president at PNB Gilts, observed that banks would be willing to get the permission to keep these bonds under held to maturity (HTM) category, over and above the existing limits. “Anyway, since the bonds would be non-tradeable, it makes sense to put them in HTM,” he said. Market experts are also waiting to see what route the government will take for equity infusion into the banks. Ananth Narayan, professor-finance at SPJIMR, said that it would be interesting to see the actual modalities of the equity infusion. “They will probably do this as a preferential allotment of shares. For the good banks they should also consider a QIP alongside. This will help bring in market funding and also ensure the government’s stake remains the same even after equity infusion,” he said.

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