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Wednesday, Nov 10, 2004

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Shorter maturity, reduced holdings — PSBs changing tack on investment portfolios

C. Shivkumar
N.S. Vageesh

Bangalore/Chennai , Nov. 9

PUBLIC sector banks have taken the lead of their private sector peers and begun shrinking the average maturity of their investment portfolio.

The maturity of investment portfolio of the PSU banks normally range between 7 and 8 years compared to about 2 years for private banks. The high average maturity of the investment portfolio of public sector banks was because they focused on picking up long dated Government securities during the last two years.

The Government has been issuing long-term paper with a view to elongating the maturity period of Government debt. Average maturity of Government debt is up from 7.7 years in 1998-99 to about 15 years in 2003-04. This suited the banks too, since yields were going down and they were able to build up a high proportion of long dated securities and then cash in on them.

Things have changed now. With interest rates in Government securities market going up by as much as 2 percentage points during the past six months, the value of some of these long dated papers has suffered steep drop. Banks have therefore been reducing their holding of such papers - some in anticipation of further rate hikes.

Indian Bank's Chairman and Managing Director, Mr M.B.N. Rao, said that the average duration of his bank's investment portfolio was down from 5.4 years to about 4.6 years as of September 30. The bank would follow a strategy of nil growth in the investment portfolio in this fiscal, he said.

Mr S.C. Gupta, Chairman and Managing Director, Indian Overseas Bank, said that his bank had "right-sized" its investment portfolio and brought down the average duration of the portfolio to around 5 years from 6 years earlier.

Other banks too are adopting this strategy with a view to remaining liquid. Some banks are attempting to increase their investment portfolios exclusively by way treasury bills - both 91-day and 364-day. This was in view of the high liquidity of T-Bills as opposed to dated securities as well as the limited depreciation risks.

The high depreciation on investments has already hit the profitability of the banks, going by the second quarter results that have come in. Bankers are concerned about this especially when some of them are planning second forays into the equity market.

Some speculate that at this rate, compliance with the dividend targets estimated in the Budget from the banks and financial sector of Rs 5,896 crore may be difficult.

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