IDBI slashes bond rates by 150 basis points - Views on News from Equitymaster

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IDBI slashes bond rates by 150 basis points

Feb 23, 2000

Industrial Development Bank of India (IDBI), for its forthcoming issue of Flexibonds-8 will offer a return of 11% for a five year bond issue. It has cut the rate of interest on this by 150 basis points from the earlier 12.5% offered in Flexibonds-7 in July'99. IDBI, is India's largest development finance institution and has been traditionally concentrating on project finance. It reported a turnover of Rs 74.6 bn for the year ending March'99.

Also for the first time IDBI has decided to introduce a floating rate bond option where the investor receives interest at a spread of 50 basis points above the weighted average yield on 364-day treasury bills. The tenor of this instrument will be five years with a call and put option after three years. The Rs 3 bn Flexibonds-8 issue carries a green shoe option of Rs 3 bn.

While it is not very clear why IDBI is raising funds from this issue there is a likelihood that for their earlier Flexibond issues where they offered interest rates to the tune of 16%-17%, they could use the funds from the forthcoming issue to finance the call option of the earlier series of these bonds.

Incase interest rates fall further after the budget, IDBI has decided not to exercise this green shoe option. There has been much speculation in the finance and banking circles of a reduction in bank rate after the rate cut on PPF. However the bank rate is affected by many other factors like inflation, credit growth and liquidity in the banking system and not just the rates offered on PPF. Some bankers feel that as interest rates have already come down in the last couple of years (from a PLR of 16.5% in 1995-1996 to 12.5% currently) a further cut would lead to a squeeze in margins. Others feel that the RBI will wait for a larger picture to emerge before reducing rates further.

In a related news article IDBI has announced the setting up of a proposed IT company. They have appointed Arthur Andersen to draw up business plans of the company. IDBI plans to offer its shareholders shares in the proposed IT company to compensate for the loss they made by subscribing to IDBI's IPO and to help retain employees in this IT arm.

IDBI is identifying consultants with international experience to transform itself into a universal bank. As ICICI has been very aggressive in its approach with its internet related ventures and its foray into the retail sector, IDBI too realises the need to buck up its act. As competition is growing IDBI needs to change with the environment as it is currently primarily focusing on project finance.

Market View:
As the market is still concerned about IDBI's NPA's it is rated as a "SELL" by many analysts

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