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Loans against RBI Relief Bonds gaining currency

George Smith Alexander

New private and foreign banks are witnessing a spurt in loans against Reserve Bank of India Relief Bonds.

Investors are lapping up these loans as the average rates are at 10.75 to 13 per cent -- since the bonds are sovereign paper --, against 14 per cent for loans against shares.

Banks are also comfortable with bonds as they are fixed-return instruments.

Shares, on the other hand, are subject to volatility and often banks have to chase its customers to replenish portfolios depleted by falling stock prices.

Moreover, unlike loans against shares, which are capped at Rs 2 million per investor, there is no limit to loans against the Relief Bonds.

The profile of customers opting for such loans, said banking sources, are different from those mortgaging shares. They are normally high net worth individuals and businessmen.

IDBI Bank's head of capital markets, S Ramnathan, said: "Unlike loans against shares, where banks maintain a lien on the securities, in the case of loans against the Relief Bonds, the bonds are transferred to the bank's name. These bonds are in the electronic form."

These bonds are not liquid and customers are therefore using these bonds as security for their own business purposes.

HDFC Bank's country head, marketing and retail assets, Neeraj Swaroop, said: "The average ticket size of the loans against shares business is at around Rs 300,000 to 500,000, while for RBI relief bonds it is between Rs 1-1.5 million."

M N Shenoi, senior-executive vice-president, retail banking, ICICI Bank, admitted there was a rush to take loans against Relief Bonds before the Budget as the investors were expecting a cut in the bond rate and they wanted to invest more in the instrument.

"Some of the directors and partners of small firms also take loans against these bonds as it is cheap compared with vanilla loans," he said.

StanChart offers loans at as low as 10.75 per cent on these securities. According to StanChart's regional head of consumer banking, Vishu Ramchandran, clients use these loans purely for bridge financing.

RBI has allowed individual banks to decide on the margin on these loans which is now between 5 and 30 per cent, depending on the maturity of the bond.

High net worth individuals have made huge investments in these bonds. In the first nine months of the fiscal 2002, investments in these bonds had reached Rs 113 billion compared with Rs 42.52 billion which was mopped in the corresponding period last fiscal.

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