The Hindu Business Line : PSU banks opting for longer term securities

Bankers said that as a result of the pursuit of longer term securities, average tenure of their portfolios was expected to rise to about 5 years. Till March 2007, bankers had an average duration of just 3 years that included both the held-to-maturity category and marked-to-market categories.

In 2007, the preference was for liquidity. The tenure of marked-to-market categories of securities, Available-for-sale and the Held-for-trading categories, were just about a year for public sector banks and under one year for private sector banks.

Moreover, most banks had anticipated that the Reserve Bank of India would migrate to the international norms for valuation of investments, in line with the Basel-II guidelines. Internationally, all investments are marked-to-market. Consequently, the preference was for shorter tenure securities, to avoid losses due to depreciation. Bankers said that the RBI had clarified those HTM investments could continue to be valued on the basis of the cost of acquisition.

Flush with cash

However, bankers said that the preference for longer term securities was largely due to the low credit offtake. Credit offtake during the peak season had been far lower than expected. Credit growth during the whole of last year was just about 17.5 per cent for the whole of 2007-08 against the previous year’s 24 per cent growth.

Public and private sector banks as a result were left with flush with cash. The high cash position was evident from the bids at the daily liquidity adjustment facility auction. At Thursday’s LAF auction, there were 52 bids for reverse repurchases for Rs 60,490 crore. Reverse repurchases implied placement of securities with the banks for mopping up liquidity.

The mop up would have been higher but for the placement of a Market Stabilisation Scheme security. The MSS security, 6.57 per cent maturing on February 24, 2011, was placed at a cut-off yield of 7.95 per cent and a weighted average yield of 7.84 per cent. The security resulted in competitive bids of Rs 6,360 crore and a Rs 2-crore non-competitive bid against a notified amount of Rs 5,000 crore.

Reverse repos

Bankers said that among the large bidders at the reverse repo window were foreign banks taking advantage of interest short-term differentials between the dollar and the rupee. Overnight dollar borrowing at 2.25 per cent, and parking the same at the reverse repo window generated spreads of over 3 per cent. Foreign banks arbitrage operations have also triggered speculation that the reverse repurchase rates may be revised to cut out the arbitrage advantages and simultaneously ensure exchange rate stability.

However, IndusInd Bank’s Executive Vice-President, Mr J. Moses Harding, said, “Getting dollar liquidity is difficult, though some carry trade is still possible. The high response to the reverse repos is also due to anticipation of revisions in the cash reserve ratio, reverse repo/ repo rates when the lean season credit policy is announced.”

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