MUMBAI, Aug 5: The Reserve Bank of India has directed domestic banks not to arbitrage on the high coupon rate of Resurgent India Bonds by extending loans to non-resident Indian (NRIs) for investments in the five-year instrument. According to sources in Indian banks marketing the RIB issue, the central bank called up the banks on Tuesday warning them not to extend loans for the purpose of subscribing to RIBs.This has placed the Indian banks at a disadvantageous position in marketing RIBs vis-a-viz the foreign banks. The foreign banks are actively extending loans to NRIs for subscribing to RIBs. The RBI writ does not run for the overseas branches of the foreign banks. "The policies are such that the RBI does not want Indian banks to make money, but it is all right for foreign banks to make a quick buck by snatching on to an arbitrage opportunity," an Indian bank official said.Foreign banks are offering loans to NRIs to subscribe to the bonds at 75 basis points above Libor - which works out to about 6.5%while the return on dollar-denominated RIBs is 7.75%.Altogether, there are four Indian banks and 10 foreign banks involved in the marketing of RIBs. The Indian banks include the issuer State Bank of India and its seven subsidiaries, Bank of Baroda, Bank of India, Canara Bank and Punjab & Sind Bank. The foreign banks are Credit Lyonnais, ABN Amro, Bank of America, Standard & Chartered Bank, ANZ Grindlays, British Bank of Middle East, Citibank, Abu Dhabi Commercial Bank and HongKong Bank. According to bank officials, their ability to market the bonds is constrained as they will be vying with the foreign banks with one hand tied behind their back. "The kitty is already identified the high networth NRIs. It's now a matter of who gets their business," a bank official said.RIBs, available in three currencies, are offering a very high coupon rate; with the dollar-denominated bonds offering 7.75 per cent return, 8 per cent on pound sterling and 6.5 per cent on deutche mark. Apart from the 0.25 per centservice charge that the banks will earn on selling the RIBs, the low cost of funds that will be given to them by SBI is attracting the banks in selling the bonds.
