The Hindu Business Line : Banks run short of SLR securities

Why the shortage
Treasury rejig by banks to avert depreciation losses
Insurers mop up more premium income, seek govt papers
Fears of lower govt borrowings on buoyant revenues

C. Shivkumar

Bangalore, Sept. 10 Faced with an upsurge in deposit growth, banks are currently faced with a shortage of Government securities for complying with the Statutory Liquidity Ratio (SLR).

Deposits this financial year surged by Rs 1.41 lakh crore. Time deposits alone rose by Rs 2.21 lakh crore between April and August this year.

On a year on year basis, deposits have grown by 22 per cent. The surge in deposits resulted in increased requirements of Government securities for meeting the mandated SLR requirements.

The deposit surge came from the downturn in the equity markets and to some extent from the postal deposit scheme.

This was in view of higher returns from banks. Banks are currently offering deposit rates of anywhere between 9.5 and 10.5 per cent for deposits with maturity profiles of between one and two years.

This year, the Government had already issued about Rs 88,000 crore of securities so far, comprising about 61 per cent of this year’s budgeted borrowings.

This amounted to about 62 per cent of the incremental deposit accretions so far.

Despite the issues, bankers said, there was a large shortage of securities for meeting the SLR. The shortage was evident from the incremental investment deposit ratio that is currently about 16 per cent, short of the prescribed SLR of 25 per cent.

Portfolio rejig

The shortage also partly stemmed from the rejigging of investment portfolios. Banks, especially the public sector ones, early this year, had moved some of their holdings to the held-to-maturity category of investments.

Under the current guidelines, banks are allowed to hold up to 25 per cent of their demand and time liabilities in the held-to- maturity categories.

The shift from the marked-to-market category was done to avert depreciation losses. However, the shift had reduced the securities available for trading purposes, bankers said.

Besides, bankers said, all the insurance companies had also picked up Government securities, after large premium accretions.

Insurers are also holding back their entry into the equity markets. Life insurers normally hold on to Government securities till maturity and seldom resort to large treasury market operations.

Insurers in market

Traders said that among the large buyers of securities this year was the Life Insurance Corporation of India. In addition, some of the non-life insurers were also buyers of Government securities to improve their mean yields that had taken a beating during the last few years.

After yields crossed the 9 per cent threshold, insurers have remained large buyers, bankers said.

Bankers said that there are also fears that the Government is likely to shave its borrowings for the current year from the targeted Rs 1.45 lakh crore in view of buoyant revenues and is likely to opt for redemptions.

The chase for Government securities dragged down the 10-year yield to maturity by about 90 basis points.

The 10- year yield to maturity was 9.27 per cent on August 1. Currently, it is 8.35 per cent. Bankers said the SLR chase has resulted in demand for hitherto illiquid securities, like state development loans.

The chase has shrunk with the spread between sovereign securities and SDLs now down to barely 25 basis points.

The spreads had widened to over 70 basis points in early August.