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C. Shivkumar

Nimble on investments anticipating tight liquidity

Bangalore April 13 Banks are continuing with the derisking of their investment portfolios despite the beginning of the lean season.

Top bankers said that they have decided to continue with containing the average maturity of their respective investment portfolios of both government and non-government securities to about two years.

The average maturity profile covers investments in both in held-to-maturity and in the marked-to-market categories. In the case of private sector banks, the average maturity profile is underone year.

Bankers said that this move was largely in anticipation of further liquidity tightening in the weeks ahead. The bankers conceded that liquidity during the last few weeks had improved in view of release of Plan funds to the state governments. Besides, some of the advance tax payments made during the last quarter of 2006-07 have begun flowing back into the banking system.

Reverse repo

The inflows were evident from the recourse to the reverse repurchase window of the Reserve Bank of India during the last few daysOn Friday, the bids made for the 3-day reverse repos amounted to Rs 19,855 crore in the first auctions. The liquidity overhang was also evident from the auctions for the 7.38 per cent 2015 and the 8.33 per cent 2036 securities. Bids for the securities amounted to Rs 11,277 crore and Rs 10,642 crore. The RBI accepted only Rs 3,991 crore and Rs 5,991 crore, from the competitive bidders.

But bankers said that despite picking up such long-tenure securities, they would still continue with the derisked portfolios. This implies that the new securities now picked would be sold on an outright basis or through switches to life insurance, mutual funds and pension funds that have appetite for long-term securities. The switches would be done for ensuring that the portfolios remained fully derisked and within average maturity profile of about 2 years, they added.

The preference for short-dated securities of under 2 years is mostly liquidity driven. Liquidity demand is likely to mount in the coming weeks in view of the expected redemptions of bulk deposits from corporates and insurance companies over the next few weeks.

Bulk deposits from corporates currently comprise at least 30-35 per cent of the demand and time liabilities. These deposits are accepted at rates as high as 11.5 per cent. Bankers said that deposit growth from retail sector was only about 22 per cent, despite offering rates of over 10 per cent for tenures of about 18 months.

Mounting NPAs

Besides some of the banks are also faced with mounting non-performing assets on their home loan portfolios in view of the rising interest rates. These banks have resorted to stretching the maturities to obviate the need for provisioning for the loans.

Yet despite this kind of financial engineering, some banks have reported bad loans of about three per cent of their gross home advances.

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