The Hindu Business Line : Banks losing interest in long-dated G-secs

FACED with a credit offtake of over 30 per cent since the beginning of the last fiscal, bankers have lost interest in long-dated government securities.

Senior bankers said most of them preferred deploying resources in credit. This trend was available from the deployment pattern of incremental resources. Incremental credit deposit is over 100 per cent.

Besides, the bankers said since most of them had a capital-to-risk-weighted-assets ratio (the minimum capital as percentage of its risk weighted assets, CRAR) of close to about 14 per cent, there was little purpose in deploying funds in low-yielding government securities. Therefore, the bankers said, they were in a position to deploy greater resources in risk-weighted assets in view of the high recoveries during the last financial year.

Some of the banks were also in the process of further augmenting their CRARs to deploy resources in credit. Moreover, most bankers already have an investment deposit ratio of over 43 per cent, almost entirely of government securities. This was well above the prescribed statutory liquidity ratio of 25 per cent.

As a result, bankers expect the auctions for government securities to face rough weather in the coming months. Signs of this were already available for the hardening yields across all maturities. One of the major reasons for this trend, according to bankers, was the fact that most of them preferred to liquidate their holdings of long-dated government securities and deploy the resources in credit in a bid to improve returns. The 10-year yield to maturity was already close to 6.75 per cent.

That difficulties were expected in finding banks to subscribe to long-dated papers was evident from the high underwriting fees fixed for the auctions for 7.95 per cent 2032 securities. The underwriting fee was 30 paise per Rs 100 for this security. For the shorter-dated security, the underwriting fee was five paise per Rs 100.

Bankers also said one of the major factors behind this lack of interest for long-dated papers was that such securities were seen as illiquid in a tightening market. In fact, most banks were moving to shrink the average maturity of their investments to less than five years. Some of the new private sector banks have already shrunk the maturity profile of their investments to under three years, making it highly liquid. Only the public sector banks, at present, have portfolios of long-dated papers in their books. Even these were in the process of shrinking them to under five years to derisk their portfolios, bankers said.

They were also faced with an increase in the weighted average cost of working funds. This was on account of the increase in deposit rates during the last few weeks. As a result, bankers said the government borrowings would face a gradual increase in yields, especially long-dated borrowings.

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