In effect, these banks will be able to get rupee resources from State Bank after surrendering the bond proceeds in dollar, pound sterling and deutsche mark. State Bank will charge interest on the rupee funds, which will carry a bullet repayment after five years when the bonds are due for redemption.

State Bank has fixed a floor of $10 million collection amount for arranging banks to be able to access the facility of "swapping" foreign currency resources with the rupee.

Confirming the move, State Bank deputy managing director and chief credit officer V Janakiraman said: "Once these banks surrender the collection of the bond proceeds, they can get an equivalent amount of rupee on which they will have to pay interest. We have fixed thefloor for collection at $10 million." In other words, those banks which will not be able to collect at least $10 million worth of Resurgent Bonds will not be able to access this facility.

"Strictly speaking, this arrangement cannot be called as swap deals since these banks will be the collecting agents and they will not own the funds. After collection, they will have to surrender the funds to the State Bank and we can place a portion of it in rupee with them. We will work out the nitty-gritty of the arrangement by the next Monday," Janakiraman said.

The interest rate on the rupee funds will be over 10 per cent, he pointed out. The cost of the Resurgent funds, according to SBI chairman, will be around 9.2 per cent. "We will keep a spread on the cost of funds," the State Bank executive pointed out.The SBI's decision to share the proceeds of the bond with the arrangers will come as a windfall for particularly the foreign banks which will be able to access cheap long-term rupee funds. Even new private sectorbanks like IndusInd which has a well spread out NRI clientele will benefit from the move.

The issue was discussed threadbare at a meeting with representatives of the banking industry with the State Bank top brass on Thursday. The meeting was attended by a string of foreign banks, nationalised banks and even new generation private sector banks like TimesBank, Global Trust and IndusInd among others. The five-year instrument, denominated in dollars, pound sterling and deutsche marks will carry a coupon of 7.75 per cent, 8 per cent and 6.25 per cent, respectively.

Insight --

Foreign banks which have to a great extent depend on the inter-bank money market otherwise to back their assets will benefit from State bank's move to allow collecting banks to swap the Resurgent India Bond proceeds with rupee.

Even though State Bank will keep for itself a spread over the cost of funds -- which is about 9.2 per cent -- the five-year money will come cheap for the foreign banks. A similar arrangement was workedout in 1991 when State Bank had launched the India Development Bond on behalf of the centre. This time around, the new private banks with a good NRI client base will also benefit from the arrangement.