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RBI sops for banks on US-64 investments

K Ram Kumar

The Reserve Bank of India has allowed banks to shift their investments in the US-64 scheme from the 'available for sale' category to 'held to maturity '. By doing this, the RBI has enabled banks to hold on to their US-64 investments at book value and they will not be required to provide for any depreciation in US-64 units.

Normally, investments in US-64 units are classified by banks in the 'available for sale ' category and the difference between the acquisition cost and net asset value is provided for in their books.

Once the investments by banks in US-64 units is shifted to the 'HTM' category -- where investments are valued at the acquisition cost -- they need not provide for any depreciation in the books.

This concession by the RBI, however, comes with strings attached. Banks will be required to amortise the premium over the face value by May 31, 2003. They will not be allowed to shift the units out of the HTM category, either in part or full. Many banks had invested in US-64 units at Rs 14 or even higher.

Given that the net asset value of the scheme is currently hovering around Rs 6.30, banks would have required to make huge provisioning on account of this investment.

The Unit Trust of India has chalked out a special scheme wherein units are being repurchased at Rs 10, with the price going up by 10 paise every month up to May 2003.

Assuming that the acquisition cost of commercial banks that did not exit the scheme before its repurchase and sale was frozen in July 2001 was Rs 14, they would have ended up providing at least Rs 4 per unit (the difference between the acquisition cost and the face value) in the current fiscal, said a senior banker at a public sector bank.

Some banks sold their US-64 investments before the sale and repurchase was temporarily frozen last year. Despite that, the banking sector has a substantial exposure to the US-64 scheme.

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