The Hindu Business Line : Banks moving into long-dated papers

Why the shift
Yields to fall due to liquidity overhang in the system
RBI silent on Basel guidelines on investments
Deposit growth swells while credit offtake is down

C . Shivkumar

Bangalore, Feb 4 Banks have begun moving into long-dated securities in a bid to beef up their investment yields, reversing a two-year trend of derisking.

Bankers said that the focus shift to investments was largely in anticipation of yields moving down before the end of this quarter. The ten-year yield-to-maturity was is already down to 7.52 per cent or down from 8.06 per cent April 02, this year.

Strategic shift

Investments of banks since the beginning of this financial year was Rs 1.68 lakh crore as against Rs 39,516 crore or 400 per cent jump. The anticipation stemmed from the liquidity overhang in the banking system. The average tenure of the investments till the end of third quarter for most public sector banks is now close to four years. Till, April last year, the tenures were under two years. While in the case of the held-to-maturity, the average tenure was closer to five years, the marked-to-market tenures are about three years.

Till the end of the lean season this year, most banks’ investments were in short-dated securities and Treasury bills, a trend that started in 2005. The preference for short-dated securities and T-bills was triggered by fear of deprecation losses.

However, banks were picking up long-dated securities of ten years and beyond even for their Available for sale and Held for trading categories. Both these categories are marked to market investments.

Aggressive operations

The reversal in strategy, top levels bankers said, was to maximise their return on assets (ROA), through aggressive treasury operations. In fact during the third quarter, many public sector banks pushed their ROA over one per cent. Syndicate Bank’s General Manager, Treasury and investments, Mr D. C. Pai, said, “With credit growth still slack, we are focussing on improving our yield on investments.”

Bankers said that their average yield on investments was barely 7.2 per cent. This was in view of high portfolio of 91 day T-bills. The shift to longer-dated securities was expected to improve average yields by another 50 to 75 basis points. Besides, bankers that the coupon flows would also improve. In fact, banks’ investment incomes as a result were expected to increase in the fourth quarter, to partly neutralise the impact of shortfalls in credit growth.

Bankers said the shift to the longer-dated securities was also driven by the Reserve Bank of India’s silence on Basel guidelines on investments. Under Basel II guidelines all investments are expected to be valued on a marked-to-market basis. Under the RBI guidelines up to 25 per cent of the demand and time liabilities are permitted to be valued on the basis of their cost of acquisition.

Bankers said the silence implied that no changes were expected. As a result, most banks have shifted to long dated securities with high coupons.

Moreover bankers said tha, deposits in the banking system between April and January 18 this financial year swelled to Rs 4.22 lakh crore or up 49 per cent over the corresponding period the last year. Credit for the same period was Rs 2.38 lakh crore or down 9.15 per cent over the same period, leading to an investment chase.

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