MUMBAI, May 7: State Bank of India (SBI), the country's largest financial-sector intermediary, plans to take a plunge into the nascent term-money market by offering only one-way quotes. This is a deviation from standard practice as commercial banks always offer two-way quotes in the market.

"We plan to offer only one-way quote as we do not intend to borrow from the market. The signal is clear: State Bank is a lender. Internationally, offering one-way quotes is an accepted practice," bank sources said. Since the bank is flush with lendable resources, the buy quotes, if at all offered, will be ridiculously low and hence there is no justification in giving two-way quotes, bank executives said.

To start with, State Bank plans to offer quotes for two-week and one-month money. "Initially, we do not want to lock funds for more than a maturity period of one month. Once the credit offtake picks up, we may shift the focus from the money market," sources said.

State Bank, its seven associate banks and Mumbai-based Bank of Baroda have been the major lenders in the overnight call money market. In the absence of demand for non-food credit, State Bank alone has been deploying about Rs 1,000 crore in the money market daily.

The bank's entry is likely to stabilise the fledgling term-money market. The market has not been able to take off following a Reserve Bank directive that has stipulated that despite the withdrawal of all reserve requirements on inter-bank borrowings, effective CRR and SLR maintained by scheduled commercial banks on total demand and time liabilities should be kept at 3 per cent and 25 per cent.

This in effect means even though banks are exempt from maintenance of SLR on liabilities to banking system, they will end up maintaining the statutory reserve requirement to some extent in that segment.

However, State Bank with its excess SLR holdings of about Rs 10,000 crore will not be affected by the directive as it can offset the extra holdings in domestic deposits against its interbank liability.

The bank decision to take an exposure in the term-money market will help the smaller banks and particularly the foreign banks raise resources to create short-term assets. The new-generation private sector banks may also act as wholesale banks by shifting the focus from retail deposits.

Some of the private sector banks are now even drawing up plans to start trading money to take the arbitrage advantage. "We will give two-way quotes, and arbitrage between the buy and sell quotes," Centurion Bank's AK Sen said.

State Bank is likely to put out its quotes from the next fortnight. "We are closely watching the scene. The term rates will have to be structured in such a way that the buyers are not able to arbitrage between term money and bank deposits. Besides, the volatility in call rates and forward premia has also be taken into account," sources said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.