According to reports, Lafarge is willing to pick up an equity stake in ACC. The probable reason for the belief is that ACC is a major player in eastern region and Lafarge has acquired the second largest capacity in the region - Tisco's 1.43 million tonne cement plant. The presence of another global major, Holder Bank (it holds stake in Kalyanpur Cement) is immaterial as KCC has very limited limestone reserves. It is well known that ACC is facing a cash crunch and industry players were of the opinion that ACC had approached Lafarge for equipment funding and in return Lafarge had wanted a stake in the company. ACC, it seems, had rejected Lafarge's proposal.

Another reason advanced for Lafarge's interest is that ACC is owned mainly by FIs. Any hostile bid for ACC will prove to be costly but giving Lafarge not less than 5 per cent equity through preferential allotment (calculated on post preferential allotment equity) and inter-se transfer after three years to avoid open offer could be apossibility. In case Tatas and/or Shapoorji Pallonji Mistry allowing Lafarge to take over the company, it will be the largest M&A deal in India. The possibility of which, at the present juncture is remote.

Bank rates

The recent softening in call rates, if sustained for at least a month, could be the precursor to a reduction in the prime lending rates for foreign banks. Foreign and the new private sector banks have conspicuously held aloof from the public sector banks' decision to reduce PLRs. While the public sector banks have obviously been influenced by "moral suasion", foreign banks did not see their short-term funding rates come down, and have thus refrained from bringing down their lending rates. Call rates have obstinately refused to come down--till now, when they have fallen as a result of market liquidity. Dealers say that banks had stacked up on gilts in anticipation of prices rising after the RBI repo rate cut, and there was some overshooting. The reaction occurred during the secondhalf of March, with banks selling bonds and going into cash. The resultant upsurge in liquidity is responsible for the lower call rates.

A striking feature of bank PLRs is the high rate for foreign banks, compared with the PSU banks. Consider ABN Amro's 16 per cent, ANZ Grindlay's 15.5, Bank of America's 16.25, Citi's 15.5 per cent compared with SBI's 12, BoB's 12. How do these banks retain clients in spite of such high rates? The fact of the matter is that while service is undoubtedly a plus point, and non-fund services form part of the overall package, many corporates get a cash credit limit sanctioned which they then use for short periods. Blue chips in any case get their funding through CPs and NCDs, far below PLR. The higher PLR is a reflection of these banks' dependence for funding on the call markets, and they operate on a strictly marginal cost basis. While the uncertainty about drawing on cash credit limits affects cash management by banks, at high PLRs they still make a profit.

Governmentborrowing

The Reserve Bank seems to have started the government borrowing programme with a bang. Faced with a huge gross borrowing target of Rs 84,000 crore the central bank has predictably gone in for innovations. For the first time, on April 7, it introduced a variant of the price auction system when it put out a Rs 3,000 crore fourteen year stock for "on tap sale" on its open market (OMO) window immediately after it was privately placed with the RBI at the same price that the government issued to the RBI. Just an hour back, the RBI had received a whopping Rs 7,000 crore for the ten year paper which was subsequently auctioned at 11.99 per cent and mopped up Rs 3,000 crore. The central bank timed the two issues superbly.

It knew that Rs 6,000 crore was coming into the system, through the redemption of the 12% 1999 (Rs 4,417.17 crore) and interest payments of 11.10 per cent gilt maturing in 2003 and the 12.30 per cent gilt maturing in 2003 on April 6 and 7. So accordingly it timed the two issues tomop up Rs 6,000 crore. Another factor that contributed to the huge mop up was the fact that the RBI had attractively priced the 12.40 per cent gilt (reissued). While it was selling the existing stock at Rs 100.40 through its sale window, it upped the price for the new stock by 20 paise to Rs 100.60. Although it translated into only a 3 percentage point hike in yield the move paid off as investors like the insurance companies, a few public sector banks, provident funds flocked to buy the security forcing the RBI to close the "on tap sale" on the first day itself instead of the five days that it had earlier decided.

The mopping up of such huge amounts of long term funds will continue as there are huge chunks of funds (nearly 10,000 crore per month) that will be redeemed in this quarter. The twin issues also indicate the RBI's motive to issue long dated securities and move out from shorter dated securities. The government borrowing is also being aided by the cut n the notified amounts of the 14 day and the 91day treasury bills. The cut in the notified amount of these T-bill sends out a signal that the RBI is not interested in mopping up short term liquidity but wants to translate this liquidity to aid the government borrowing programme.

Banks/Insurance

Opening up the insurance sector has been construed as a windfall of sorts for the public sector banks. The argument is that the branch networks of these banks translates into a phenomenal distributional reach. Banks can utilise their branch network to generate business for their insurance ventures. At the same time, the branches will be able to earn commission income by charging for the use of their premises.

It is possible that the utility of these branch networks may have been overstated. Insurance, especially life insurance, has to be sold, and the existing staff at public sector bank branches have neither the experience nor the aptitude for selling. That is the reason why banks venturing into insurance are planning an agent network. However, thebank branches can handle the back office transactions of the insurance arm, earning a fee in the process.

But there are doubts whether this will actually be the case. Banks which have set up mutual funds have invariably used the offices of agents for selling units, while they have tied up with investor service centres for servicing clients. The branch network has not proved to be of any help, other than for the task of accepting deposits, remittances etc. There is no particular reason why the arrangements for bank-promoted mutual funds should be any different from bank-promoted insurance agencies.

(With contributions from Urmik Chhaya & Anirban Nag)