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C. Shivkumar

Bangalore, Nov. 14 States are beginning to benefit from the chase of government securities by banks as yields have fallen sharply since the beginning of the financial year.

At the last auction of State Development Loans (SDL), the average yield was 8.2 per cent on November 11, below the small savings rate of 8.5 per cent.

In the secondary market SDL yields have already fallen to close to 8.1 per cent. This is the first time this year that SDL yields were dropping below the small savings rates.

In August for instance, States using the auction route had paid up to 9.5 per cent on SDL placements. SDLs are sovereign guaranteed placements. In April, SDL placements were done at yields of 8.6 per cent.

The rush for SDLs was also evident from the increasing bid-to-cover ratios.

The bid-to-cover ratio indicates the preference for securities. High ratios implied high demand. For most part of last year, the bid-to-cover ratios on SDLs were barely about 2 times. The November 11 auction saw a bid-to-cover ratio of 3.6 times, implying the high demand for the SDLs.

The SDL preferences were also driven by flight of deposits from the equity markets into bank time deposits, particularly public sector banks. The surge in time deposits was evident from the October figures of the Reserve Bank of India.

In October alone, time deposit accretions into the banking system were Rs 94,000 crore.

These accretions were far more than inflows in April, when banks normally resort to window dressing of their respective balance sheet. In April this year, the accretions were about Rs 67,000 crore, despite the cut-throat competition for bulk funds.

Top bankers said the current level of accretions had led to higher demand for government securities for maintaining their respective Statutory Liquidity Ratio (SLR).

Although the prescribed SLR is currently 24 per cent, bankers said the ratio was likely to come under pressure. This was evident from the falling government securities investment deposit ratios (IDR).

IDRs at the beginning of this financial year were over 30 per cent. Last month end the ratio had dipped to 28 per cent, for all the banks.

However, on an incremental basis, the G-Sec IDR was less than 10 per cent. Incremental IDR at the beginning of this financial year was 31 per cent.

Bankers said that the falling ratios were leading to the chase of SLR eligible securities since deposit accretions are expected to continue for some more time. This was even after assuming a retreat in interest rates on deposits as mandated by the Union Finance Ministry, the sources said.

The high demand was also driven by redemptions of G-Secs coming up this year. Besides, bankers said that there were also possibilities that the amounts on offer through the T-bills would be pruned in the coming auctions, leading to a further shortage of securities.

The falling SDL yields were expected to have positive impact on State government revenue expenditure. Interest payments on SDLs are part of the revenue expenditure.

Besides, most States had provided interest expenditure in their budgets assuming a yield of 8.5 per cent for the current financial year.

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