The Hindu Business Line : Banks show disinterest in State loans

Banking sources said that only a few were interested in the State papers given the current pace of credit growth. But bankers also said that the disinterest in the State development loans (SDLs) was partly on account of the long maturity dates. Most State government papers have maturities of at least 10 years.

Bankers said that few of them were interested in long-dated papers, given the current trend of rising interest rates. In fact, several banks have already begun liquidating their long-dated papers.

Most of them were reducing the average maturity of their investment portfolios to less than five years, as a process of de-risking their marked to market investments.

The fear was that picking up papers at the prevailing yields would lead to an erosion of bottom lines, through depreciation.

Besides, bankers said that despite the sovereign guarantee status accorded to SDLs, bankers were not keen in picking them up maintaining their statutory liquidity ratios (SLR).

Bankers said that this was partly because most already had investment deposit ratios in excess of 44 per cent, way above the prescribed SLR of 25 per cent. Consequently, they said that they would prefer to park their investments in reverse repos of the RBI. Reverse repo operations give banks a return of 4.75 per cent and for most banks, this means a spread of at least 0.5 basis points over their weighted average cost of working funds.

But bankers also said that the disinterest in SDLs was also partly on account of the large interest over dues on some papers. Although technically bankers said that they had a right to invoke their guarantees, few ever did so.

This was partly because despite delays in interest receipts, there were no defaults, as the RBI intervened in ensuring that debt-servicing obligation were met, through pre-emption of central transfers. Above all, bankers said that with credit offtake on overdrive, most of them preferred to remain under weight on low yielding SDLs.

The 10-year yield-to-maturity is currently about 7.10 per cent. Credit that has maintained a growth of over 25 per cent since the beginning of the last financial year generated a spread of over 5 per cent over the weighted average cost of working funds.

Besides with the Securitisation Act crossing all legal hurdles, bankers had little fear of a major accretion of non-performing assets.

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