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C. Shivkumar

Prefers to T-Bills to avert depreciation losses

Bangalore May 7 As a prelude to Basel-II compliance, major public sector banks (PSBs) have minimised their investment risks.

Bankers said that almost all the banks with international operations had completely derisked their investment portfolios shrinking their durations. The average maturity of investments of the PSBs was only about 2.5 years. However, in the case of banks having international operations, the average maturity was barely two years.

Bankers said the duration was shrunk to avert depreciation losses, after migration to Basel II. The roadmap for migration to Basel II regime is from March 2008 for banks with international operations and March 2009 for banks with domestic operations. In fact banks like Canara Bank were holding the bulk of their investments in Treasury bills. Canara Bank's investments portfolio for the financial year 2006-07 was slightly over Rs 45,000 crore.

Treasury bills

The Canara Bank's Chairman and Managing Director, Mr M.B.N. Rao, said, "We are holding most of our investments in Treasury bills."

But even here, almost 80 per cent of the investments were held in 91-day Treasury bills, he said. This preference extended to PSBs with global operations as they race to become Basel-II compliant. The preference for the 91-day T-bills was evident from the large number of bids at the weekly auctions. Since the beginning of the current financial year, bids for the 91-day T-bills have mostly been at least 100 per cent more than the notified amount of Rs 2,000 crore.

The reason: Treasury bills are highly liquid instruments. Besides, on these instruments, the losses due to depreciation, in the event of yield spikes, were minimal. The strategies for investment derisking were similar in other public sector banks as well including the Punjab National Bank. In fact most of these banks were making more of their investments marked to market, as a result of the shift to T-bills. This was despite the fact that under the current RBI guidelines at least 25 per cent of the Demand and Time Liabilities could be held in the form of `Held to Maturity' category securities. But banks like Canara Bank were holding only about 13 per cent of their DTL as HTM.

Bankers said the preference for T-bills was also driven by the Basel-II guidelines. Under Basel-II guidelines all investments are to be marked to market (M2M). This is also the global accounting standard. Accordingly, many banks were expecting the RBI to begin notifying the transition to M2M regime well before March 2008.

Besides, the preference for T-bills was also driven by the flat interest rates across all maturities. Currently, the yield on the 29-year paper was 8.4 per cent whereas the yield on 91-day T-bill was 7.7 per cent in the last auctions. Bankers said they were in a position to absorb this loss, as a premium for liquidity.

More Stories on : Public Sector Banks | Standards & Benchmarks | Short Term Instruments

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