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ON A VOLUNTARY basis not many nationalised banks would like to unload illiquid but high-yielding Government securities at off-market prices to New Delhi. That is the first guess on Mint Street though banks can be persuaded to work the scheme that probably has only the reluctant approval of the RBI. At no point of time were banks uncomfortable with this lot of sovereign paper which were generally held to maturity to earn an assured income of 11-13 per cent per annum. Seemingly, LIC, which lends long, is against unloading government paper, it being a sure stream of revenue. Top LIC officials are prepared to buy up such paper from banks at the going market prices, although trades are rare. An option being bounced around is to arrive at the market price from the prices of other low-yielding securities, and then deduct the 35 per cent income-tax banks are liable to pay to compensate government for revenue loss. Banks could classify premiums earned as business income to gain additional tax deductions and provide for NPAs. To help the swap, New Delhi will issue fresh floating rate paper with put and call options added on.

Will the bait work, as under the RBI guidelines, banks have been building an Investment Fluctuation Reserve from trading profits to protect trade portfolios? Private banks (at least the new breed) and the foreign variety may not benefit as they rarely pick up junk. Going by a recent RBI study, holdings of old loans formed 87.1 per cent of total government scrips held by banks as on March 31, 2002. For SBI and its associates and nationalised banks, 48.4 per cent of the holdings were old with maturity between April 2005 and March 2010. Further, 39.1 per cent of the old loans held by government banks had a maturity beyond 2010. Interestingly, the proportion of banks' holdings with a ticker of 11 per cent and above has dropped between 2001 and 2002. Gilt with yields of 12 per cent and above formed 27.4 per cent of holdings in 2001 against 24.9 per cent in 2002 while that with an interest tag of 8 per cent to 11 per cent moved up from 12.6 per cent to 23.6 per cent. An identical problem could crop up when the Centre-State debt swap is put in motion.

In the event, is there any need to help banks battling NPAs when most are not keen on the idea? An offshoot of the two debt swaps is the near certainty of the Finance Ministry and the RBI sticking to a low interest regime as otherwise the gamble of fresh for old loans may not come off. Off-market swaps usually distort the yield curve, remind treasury heads. Banks can bring down NPAs through the ARCs or the Securitisation Bill. More meetings could be fruitfully spent by the Finance Ministry and the RBI to bring down bank lending rates. Some time ago, bank chairmen waited for the government to knock down yields on contractual savings and the RBI to snip savings rates. Both the conditions have been met and yet the PLRs are around 10.50 per cent when they should be around 9 per cent. For the year ending March 31, 2003, banks are expected to turn out good profits from treasury incomes. With the RBI turning upside down income recognition norms from actual to accrued basis, banks should be sitting on a pile to justify a PLR of 9 per cent. The word on Mint Street is banks are now awaiting a Bank Rate cut by the RBI in April.

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