The Hindu Business Line : PSBs stay away from bond market

NATIONALISED banks, major investors in the bond market, have been staying away from investing and trading in Government securities for the past few weeks.

According to market players, valuation of portfolios of these banks might suffer if they actively participate in the market and hence they have reduced their activity ahead of half yearly financial results.

Nationalised banks contribute to around 20 per cent of the volumes in the Government securities market.

Dealers said average volumes in the bond market which range between Rs 5,000 crore and Rs 6,000 crore had dropped to Rs 2,500-3,500 crore as trading activity by these banks has petered out.

Public sector banks have huge holdings in Government securities; one of the large public sector banks has a holding of nearly Rs 1,50,000 crore.

Prices of securities have been under pressure with the yields rising since May. Selling of large holdings in such a scenario will trigger a further downward spiral in prices, which might cause the yields to soar even further.

". Booking profits in few securities might depress the entire holdings of banks," said a bond trader with a private sector bank.

Mark-to-market (MTM) valuations of banks will take a hit in such a situation concur traders. A part of their holdings might fetch reasonable resale value, but with prices plummeting, the value of their securities portfolio is likely to plunge. This will have an immediate impact on the half yearly balancesheet as the portfolio will be valued on prices prevailing immediately before September 30.

The Reserve Bank of India has now permitted banks to transfer gilts from trading portfolio to the held-to-maturity (HTM) category. The transfer has to be done at purchase price or market price whichever is lower; this also warrants that prices do not fall heavily, said traders.

"If a security was purchased for Rs 110 and the price is currently at Rs 106 the loss shown on a bank's portfolio would be Rs 4. But, if due to depressed prices a major sell-off takes place in the paper, prices might fall to Rs 103 which will result in a Rs 7 loss on the portfolio," said a bond trader with a primary dealer.

Banks are also not finding it attractive to take positions in Government securities as credit offtake is picking up opening up more options to deploy funds. Dealers said that extending new lines of credit to corporates or other sectors is also becoming an attractive mode of fund deployment.

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