"In the last seven to eight years, we have not raised any SLR bonds. We will repay the SLR bonds which are remaining with us in the next five years," IDBI chairman G P Gupta said here.

Financial institutions found SLR bonds as a cheap way to raise resources as banks were required to invest a portion of their deposits in SLR bonds as part of Reserve Bank of India (RBI) guideline. However, the route was closed in 1992-93, following government ban on financial institutions raising funds through SLR bonds.

Gupta admitted that this will put a pressure on IDBI's margins as the institution will have to replace this with higher cost funds. As the SLR bonds were backed by government guarantee, it commanded rates equal to that of government securities (Gilts).

Already, IDBI is facing pressure on itsbottomline with the spreads thinning down from 3.9 per cent to 2.6 per cent this year, Gupta said. Gupta said financial institutions were finding it difficult to raise funds at cheap rates as yield on government securities were ruling high.

"With yield on government securities ruling in the range of 11.7 to 11.8 per cent, we are forced to raise resources at 150-200 basis points higher, making funds extremely costly," he said.

The prime lending rates (PLR) also cannot be tampered with as the system was not accepting high-cost funds. IDBI's PLR is around 13 per cent. Gupta said the low cost SLR funds at the institution's disposal had decreased to 25 per cent from 60 per cent a few years back.

In view of the falling margins, the institution has asked the finance ministry for tax breaks on its mobilisations. He said the institution was also planning a strategy to raise funds in a cost effective manner to stay competitive. Gupta, however, declined to give details of the strategy. The institution is raisingabout Rs 7,000 crore annually through "Flexibonds".