SBI chairman MS Verma said the "consideration" for the "insurance cover" will be minimal and "the bank will not incur any loss on account of the exchange risk". According to the SBI chairman, the guarantee fee will be shared by the bank with its borrowers. "This will be factored into while fixing the lending rate on infrastructure financing," Verma clarified.

"We have designed the product is such a way that the cost (of the exchange risk) will be shared by three sides equally. While the government will provide the risk cover, the cost of the guarantee will be borne by the borrower as well as the bank," he said. Taking into account the guaranteefee and other transaction costs, the cost of the bond -- which will be treated like a five-year deposit -- will work out to 9.2 per cent.

"This is cheap money as we pay 11.5 per cent on three-year term deposits. We will be able to lend the fund at about 13 per cent," Verma said. The bond, according to him, will have three dimensions: It will ensure availability of funds, create alternate resource base and effect immediate reduction in cost of funds. For all practical purposes, the bond will be treated like five-year FCNR(B) deposits with exchange risk being borne by the centre.

"This will not be a part of our tier-two capital. The proceeds will be subjected to SLR and CRR requirements and will be shown as other liability in SBI books," Verma said.

In case of the India Development Bond, the Reserve Bank carried the entire exchange risk without charging any guarantee fee to the bank. The five-year instrument carried a coupon of 9 per cent -- 50 basis points over the three-year prevailing FCNR(B)dollar deposits. The present interest rate on three-year FCNR(B) deposits range between 6.25 per cent and 6.50 per cent.

In case of IDBs, the State Bank swapped the entire corpus with the RBI at a nominal rate -- the spot rupee rate on the day of swap. On redemption of the IDBs, the Reserve Bank released an equal amount of dollar taking the hit of over Rs 2,000 crore to bear the exchange risk.

The entire money came from the exchange fluctuation reserve. This time, however, the State Bank has the freedom to park the proceeds abroad and convert them into rupee to lend to infrastructure projects as and when it is required. "The major part of it will be brought into India to be lent in the Indian currency. Those project which will require forex fund will have to bear the exchange risks themselves," Verma clarified.