FIs recall high interest bearing bonds

FIs recall high interest bearing bonds
ENS ECONOMIC BUREAU

MUMBAI, JULY 8: With interest rates coming down, financial institutions have started redeeming bonds -- which carry high interest rates -- issued earlier using the call option. Industrial Development Board of India (IDBI) and Industrial Finance Corporation of India (IFCI) have decided to exercise their call options on their bonds issued in 1996, giving a jolt to investors.

IDBI is recalling its 25-year Deep Discount Bond and the Retirement Bond whereas the IFCI has recalled its Education Bond and Retirement bond. These bonds were launched in 1996 and were hugely oversubscribed. The attractive returns offered by these institutions lured the money away from the banks. Also, the Deep Discount Bond and the education bonds provided a fantastic opportunity for the middle class to "secure" the future of their children for an investment of Rs 5,300 in case of the IDBI and Rs 6,000 with the IFCI, which would make the children "lakhpati" once they were 25.

``The institutions, on the other hand, are quite relieved at being able to shed off the liability at the very first available call option. In an uncertain interest rate scenario, these institutions had an unenviable and huge liability to be serviced at very high interest rates. Both these FIs had contracted the funds at about 16 per cent five years back and the interest rates have been on the decline ever since then,'' said an analyst.

In any case, the liability has doubled for the IDBI and IFCI as they have to end up paying double the amount to the investors. ``Although the offer documents had clearly mentioned the call option available to the companies at different periods, for the common investor, this decision was a bolt from the blue, since these are the most reputed financial institutions in the country. If they are using the call optionm, there was no need to launch the bond issues,'' said an investor.

IDBI had accumulated Rs 1,500 crore by the way of these deep discount bonds. The annual interest outgo on these bonds was in the region of Rs 150-200 crore per annum. However, the IDBI has offered the 20-odd lakh investors an option to reinvest the proceeds from the bond issue in its fixed deposit scheme and promises "a rate better than the market return."

IFCI, on the other hand, has been in deep financial distress of late and the redemption of the bonds has more to do with the health of the company than just interest rates. The company skipped its dividend for the first time in its 52-year history and has been struggling with very high NPAs. The NPAs stood at 21 per cent of the net advances at the end of 1998-99. IFCI has already retired high-cost borrowings to the tune of Rs 2,300 crore between January and March 2000.

Things have, however, changed on the interest rate horizon. And although it could be difficult to argue the course of interest rates, as of now, the institutions have made a smart move to relieve them of the excess baggage which would have made them resemble beasts of burden than some financial institutions, said an analyst.

IDBI is using the call-option on its `Flexibonds' issued in 1996, which had offered an interest rate of 15.5 per cent. The latest issue of bonds by IDBI about three months back had an interest rate of 11.5 per cent, about 400 basis points less than the `Flexibonds-I'.