FIs to cash in on govt savings rate cut

MUMBAI, Jan 5: The recent interest rate cut on small savings schemes of the government like National Savings Certificates (NSC) has come ...

MUMBAI, Jan 5: The recent interest rate cut on small savings schemes of the government like National Savings Certificates (NSC) has come as blessing in disguise for the financial institutions which have been struggling to get subscriptions to their retail bond issues.

Industrial Development Bank of India (IDBI) has targeted investors in government saving schemes like NSC for its on-going Rs 750-crore flexibonds issue. Similarly, ICICI which had just finished one tranche of safety bond issue worth Rs 300 crore is planning one more safety bond issue in this month itself. The coupons on the instruments will be pegged at the same rate at which the institution hit the market in December.

On Friday, the government had brought down interest rate on its savings schemes to bring them in line with the interest rates paid by banks. Following the rate cut, the interest rate on National Savings Certificates has come down to 11 per cent while IDBI Flexibonds’ Infrastructure Tax Saving Bond, which also is tax free like NSC, offers 12.5 per cent.

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Interest rate on all other deposit schemes of the government such as post office and small savings scheme has also come down by 1 per cent. An IDBI official said that government’s savings rate cut has made their bond offering more attractive.

While IDBI’s bond issue closes on January 14, ICICI is planning their next bond issue on January 21 to wean away investors from government deposits. The ICICI issue will be kept open till February 9.

"We are not cutting down the coupons even though the government savings schemes are offering lower rates now. The cut in government savings schemes is a correction long overdue. We do not think it will have any impact on the prevailing interest rate structure of the system," a senior ICICI official said.

The term-lending institution will offer 13 per cent monthly interest coupon on their regular bond scheme while the annual yield will be pegged at 13.75 per cent.

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The tax-savings bond will offer 12.5 per cent while the money double scheme will offer to double the investment at five years and four months ensuring an yield of 13.9 per cent. The encash bond will offer 13.7 per cent and the seven-year regular income bond 14 per cent. ICICI will float a new instrument in this tranche of its retail issue.

The public response for financial institutions’ bond offerings had been coming down off late. ICICI has garnered Rs 1770 crore in 1998-99 in four issues, excluding the recently concluded one. It collected Rs 472 crore in the first issue of Rs 300 crore plus the green shoe option for same amount, Rs 504 crore in the July 300 crore issue, Rs 417 crore in the August 300 crore issue and Rs 427 crore in the Rs 400 crore October issue.

Other institutions like IDBI and IFCI has also received reduced response in recent issues.

The other major avenue of resource raising for the institutions– private placements with banks — has also dried up following the Reserve Bank of India directive in October which said that banks’ investment in corporate bonds with financial institution’s guarantee should be treated as part of banks’ total exposure to FIs.