The Hindu Business Line : Bond data show banks are reluctant to lend

Mumbai, Dec. 2 Indications of an economic uncertainty/downturn are clearly being thrown up in the Government Securities market. This is underscored by the fact that the 91-days Treasury Bill and the benchmark Government Security of 10-year residual maturity are both being quoted at the same, around 7 per cent, yield (annual return on an investment) levels, making for an almost flat yield curve.

Despite abundant liquidity in the banking system, banks are not lending. Instead, they are taking the easy way out by either investing in government securities or parking surplus funds with the Reserve Bank of India.

Bond market wisdom has it that the yield curve, which plots the relationship between yield and time to maturity of bonds, normally slopes upwards from left to right i.e. yields rise as maturity lengthens. But the curve at present has become flat, implying that dated securities, with residual maturities at least up to 10 years, have similar yields. Thereafter, the curve edges up, but only slightly.

Inverted curve

A couple of months ago, the yield curve was inverted i.e. long-term yields fell below short-term yields, with overnight call money being dealt at 23 per cent levels, 91-days T-Bill being quoted at a yield of around 14 per cent and the benchmark Government Security of 10-year residual maturity being quoted at a yield of around 9 per cent. Inverted yield curve indicates that the economy will slow or even decline in the future.

“Growth is stalling. The term structure of interest rates is indicating as much. In order to spur growth, signal rates -reverse repo and repo - should be cut further. The transmission effect of this action will ensure that the cost of funds for the productive sectors of the economy comes down. Also, the Government should start spending on infrastructure projects so that the fortunes of steel, cement, and allied sectors could be revived,” said Mr N.S. Venkatesh, MD & CEO, IDBI Gilts.

Credit offtake slow

Currently, banks appear to be more comfortable deploying their surplus funds at the reverse repo window of the RBI and earn 6 per cent per annum interest rather than lend. This is borne out by the fact that on Tuesday, they parked surplus funds amounting to Rs 52,980 crore with the RBI.

“While banks’ deposits are growing, credit off-take is not happening. Hence, they do not have much of a choice i.e. either they buy Government Securities or park funds with the RBI. Thanks to the demand for government securities from banks, yields are coming under pressure,” said Dr Golaka C. Nath, Senior Vice-President (Economic Research), CCIL, said.

He pointed out that there was almost no arbitrage between the 10-year paper and the one-year paper. The yield curve is almost flat.

“There is a flight to safety among investors. Banks are investing in government securities as the equity markets have become volatile. Further, they are more inclined to park surplus funds with RBI than make loans available for productive purposes. This is clearly indicated by the recent daily average reverse repo volumes of around Rs 15,000-20,000 crore,” said a banking analyst with a leading brokerage.

Although the Statutory Liquidity Ratio requirement for banks is 24 per cent, it is effectively 21.5 per cent due to the leeway given to banks to borrow for on-lending to mutual funds and non-banking financial companies and the special refinance facility given to banks. Most banks are still maintaining around 26 per cent in SLR because they feel it is safer than lending, the analyst added.