The Hindu Business Line : Investment portfolios begin to pinch banks

Top bankers said that the spreads on investments were already negative. This implied that the average yield on investments was lower than the average cost of working funds. Bankers said that this trend was largely due to the hike in deposit rates during the last few months.

One of them said that it was even worse for some private sector banks, since some of them had also raised resources through issue of certificates of deposits at rates between 8.5 per cent and 9 per cent. Bankers also said that the yields on gilts were far lower. The yield on ten-year paper was still at least 100-150 basis points lower.

But most banks, since last year, had consciously switched to short-tenure securities to de-risk their portfolios. De-risking implied ensuring that their investment portfolios were liquid.

Shrinking portfolios

Given this kind of a situation, bankers have begun shrinking their investment portfolios, especially their Non-SLR (Statutory Liquidity Ratio) holdings, further.

Yields on these investments were still above the average cost of working funds, bankers said, though they would all have to be provisioned under the new guidelines of the Reserve Bank of India (RBI), in conformity with Basel II. This would imply that these assets would come under dynamic risk weighting that could change depending on industry/company-specific risk perception.

However, the major problem was that in some of these papers, the yields were actually lower than the incremental cost of deposits. Besides, none of these papers are treated as liquid, since they are not eligible for repurchase operations through the RBI window or through the collateralised borrowing and lending obligations markets. That made these papers virtually illiquid.

Bankers said they were, therefore, left with few alternatives other than pushing up their lending rates further. But they added that steep hikes in the benchmark prime lending rates (BPLR) were unlikely immediately. Currently the BPLR ranges between 10.75 and 11.5 per cent. Instead, the bankers added, lending at discounts to the PLR would now cease. A banker said, "Future advances can be done only on a PLR plus rates, even for good corporates. This is essential to preserve our bottom lines."

More Stories on : Investments | Fixed Deposits | Interest Rates

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Investment portfolios begin to pinch banks

ICICI Pru upbeat on health insurance, pension segments

RBI raises reverse repo, repo rates

RBI releases data on ECB and FCCB

KVB brands funds transfer service

`RBI move a measure to contain inflation'

Credit growth subdued so far, say bank chiefs

Call rates unchanged

Bank of Rajasthan hikes FCNR, NRE rates

Uttaranchal signs MoU with RBI