The Hindu Business Line : Banks move govt securities from active trading

SOME of the top banks in the country have, in the last six months, shifted over Rs 68,000-crore worth of government securities held by them for active trading into one that would be held as permanent investments till redemption.

This follows a massive juggling act by these banks that shiftedthe bulk of their long-dated illiquid or high coupon, SLR securities to the Held to Maturity (HTM) category basket, where they can hold these papers until the date of their maturity and not mark them to market.

In response to uncertainties in the interest rate and inflation front, the Reserve Bank of India had in September last year, as a one-time measure, allowed commercial banks to transfer government securities in excess of the prescribed 25 per cent limit, to the HTM basket.

"ICICI Bank has shifted around 90-95 per cent of the securities from its Available for Sale (AFS) basket to HTM, while other mid-sized banks such as Andhra Bank, Allahabad Bank and Corporation bank have moved around 70 per cent to HTM. Other banks on an average have shifted around 40-50 per cent to the HTM category", said an analyst with a leading equities broking firm.

Those availing themselves of this facility had to take a knock on their treasury profits over the last couple of quarters, because as per RBI regulations, the transfer of securities was done at market price, which was much below the holding price of the papers.

However, State Bank of India and Bank of Baroda, refrained from shifting securities to HTM, based on the view that interest rates will be stable in the short-term.

Some analysts are of the view that going by the current trends their gamble might well pay off.

Last year, the annual WPI-based inflation rate touched a three-and-a-half-year high of 8.17 per cent for the week ended August 21, 2004. Since then, the inflation rate has eased to 5.42 per cent during the week ended January 15.

The ten-year bench mark paper yield, which soared to 7.2 per cent levels late last year, currently rules at around 6.68 per cent levels.

Analysts are of the view, that although the inflation rate may have softened in the recent past and oil prices seem benign at the moment, there might be an upward pressure on interest rates in the medium term due to aggressive credit pick-up in the economy. The Employee Provident Fund rate hike was also expected and has been discounted to some extent.

"There might be a window of opportunity for those that have not shifted to HTM to do it, when the ten-year yield goes down to 6.5 per cent, if the Rs 5,000-crore auction of the 8.35 per cent 2022 paper gets a good response from the market. If not, the ten-year yield might hover between 6.7 per cent and 6.8 per cent over the next few days. Subsequent to that, we may see some softening ", said a debt market analyst.

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