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C.Shivkumar

Bangalore, Nov. 17 Faced with burgeoning deposits, banks are beginning to stretch their investment portfolio to longer-dated securities.

Top bankers said that the longer-rated securities were held in their respective marked to market (MTM) categories – Available for Sale (AFS) or in the Held for Trading (HFT). Most of the securities held in these categories were new issues made during the second and third quarters of the current year.

These issues and additional purchases have now pushed the average tenure of the securities to a little over 2.5 years for the sector. Till last year, private sector banks’ average tenure was under one year. Public sector banks’ average maturity profile was about 1.5 years.

Mr S. Srinivasa Raghavan, Vice-President & Head- Treasury, IDBI Gilts, attributed the recent shift to long-dated paper to the anticipation of a rate cut by the Reserve Bank of India. There was the possibility of making better capital gains in long-dated papers if that happened, he said.

Increasing the MTM holdings was done in anticipation of the possibility of a further appreciation in the values of government securities. An appreciation in values implied a softening of yield-to-maturity (YTM). Bankers said that they anticipated the current trend in yields to continue well into the next year. Consequently, holding securities in the AFS or in the HTM categories allowed banks to book profits from treasury operations.

Currently, none of banks are in a position to sell a major portion of their securities since most of them had already transferred the bulk of the securities into their Held to Maturity (HTM) category. At least 75 per cent of the banking sector’s investments are currently held in the HTM category. The transfers were done to offset depreciation losses in their balance sheets.

The bankers said that securities with high coupons would be left in the HTM category itself. Besides, profits from sale of HTM securities were treated as below the line items and consequently would have to be shown only in the capital reserves.

The chase for the long-dated securities was evident from the high bid-to-cover ratios. Till the first quarter of the current year, bid-to-over ratio at the RBI’s auctions ranged between 1.6 and 1.9 times. However at last weekend’s auction of government dated securities for placement of the 7.56 per cent 2014 and the 7.95 per cent 2032, the bid-to-cover ratio was over 3, clearly indicating the preference for G-Secs.

Bankers said that the high ratios stemmed from the mounting demand for government securities for meeting the Statutory Liquidity Ratio (SLR). Although the SLR was now down to 24 per cent, demand was expected to continue in view of the high deposit inflow into the banking system, they said.

Time deposit inflows into the banking systems are currently in excess of Rs 3,000 crore per day. Bankers said this alone was sustaining the demand for government securities. The large inflows into the banking system consequently gave banks sufficient leeway to cut deposit rates in the coming weeks, they added.

More Stories on : Banking | Govt Bonds | Fixed Deposits

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