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Physical gilts trading may be phased out

BS Banking Bureau

The Reserve Bank of India may consider banning physical trading of government securities altogether to avoid a recurrence of gilts scam even as the Maharashtra government and the central bank are closely monitoring the scene and are ready to supersede a few more cooperative bank boards involved in the scam.

An internal RBI estimate puts the number of cooperative banks violating the central bank's guidelines in government securities trading at around 20. However, these banks may not have burnt holes in their balance sheets even though some of them are involved in unholy alliances with a few brokers.

There is another set of cooperative banks, led by the Nagpur District Central Co-operative Bank, which committed large-scale fraud in connivance with a section of bond brokers, and lost heavily.

"There is no link between the two sets of banks. Even those banks that have committed the fraud have not done so in a collective manner. The frauds are individual cases. The central bank does not see any systemic risk," said a source close to the RBI.

Physical trading is less than 1 per cent of the total trading volume in the government debt market. The RBI may phase it out and switch over to gilts trading in dematerialised form within a time-frame, said a source. In effect, no physical transaction of government securities will be allowed outside the securities general ledger and constituent SGL routes.

According to sources, around 20-odd urban cooperative banks have taken huge positions in government securities and were found involved in excessive trading in violation of the norms. For instance, they have taken huge exposure to bond brokers, violating the individual limit of 5 per cent of the total annual transactions, which is the cap for dealing with any approved broker.

"There have been cases where a broker has not acted as an intermediary between two banks but actually sold securities to a bank from its own kitty, which is banned. No bank is allowed to deal with a broker on a principal-to-principal basis," said the source.

Moreover, at least five banks have been found to have given power of attorney or authorisation to brokers to deal on their behalf in the gilts market, throwing all prudential norms to winds.

The Nagpur bank has lost around Rs 1.25 billion because the brokers did not deliver the securities to the bank after getting the payment. Similarly, Vardha Central Co-operative Bank also lost money as the securities were not delivered.

Both the banks have slapped criminal cases against some brokers. Junglee Maharaj Co-operative Bank in Pune is also believed to have lost money in the gilts scam. Problems have surfaced at the Osmanabad and Wardha district co-operative banks too.

Market sources said at least six banks in Gujarat - at Surat, Navsari and other pockets - have lost around Rs 700 million as one particular gilts broker failed to deliver the securities after taking the money. The firm had a higher exposure to these banks, but subsequently it delivered some securities, sources said.

The list of brokers implicated in the scam includes Home Trade, Giltedge Management Services, Indramani Merchants, Century Dealers and Syndicate Management Services.

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