The Hindu Business Line : Banks await cues for raising average maturity profile of investments

Bangalore, July 29 Banks have opted to wait for cues from the Reserve Bank of India (RBI) before stretching the average maturity of their investment portfolios.

Public sector banks currently have an average maturity of 1.5 to 2 years on their investment portfolios, government securities. Private sector banks have even less than a year.

The tenures were reduced in the beginning of 2004, by liquidating long dated securities to sustain credit growth.

High liquidity

However, the situation has reversed and markets are currently inundated with liquidity. The high liquidity is evident from the softening of the 91 day T-bill yields to 4.46 per cent, about 156 basis points, below the RBI’s reverse repurchase rate of 6 per cent.

Bankers said, despite this trend, most of them were in no hurry to reverse derisking of respective investment portfolios. Investments comprise at least 32 per cent of the deposits.

The Canara Bank’s Chairman and Managing Director, Mr M.B.N. Rao, said, “It is too early to increase the average maturity profile of investments. We will wait for some more time.”

Banks’ reluctance to rollback derisking stems from Basel II compliance requirements by this year-end for those with international operations.

Basel II compliance entailed the entire investment be marked to the market. RBI guidelines are yet to be issued on the subject. But bankers said the current liquidity situation provided a window of opportunity to banks to move in this direction.

Bankers also said they would prefer to wait, since the peak season was yet to begin.

Typically credit growth slows down during the April- September half and picks up in the latter half of the year, when the peak season kicks in. Credit growth is currently only about 22 per cent per annum.

As a result, cash balances with the banks have been on the rise. Incremental cash deposit ratio, a measure of cash balances held by banks and with the RBI, is currently about 41 per cent. The high cash balances were also triggered by the sharp acceleration in deposits that are now growing at an annual clip of about 25 per cent. In addition, RBI’s interventions in the foreign exchange markets have resulted in creation of high powered money.

Some surplus cash was deployed in the call and collateralised borrowing and lending obligations markets where rates are now under 0.25 per cent.

Besides, bankers have been unable to park the funds in the reverse repo window of the RBI, in view of the Rs 3,000-crore cap. Several banks though have been clamouring for removal of the cap.

However, there are doubts expressed among the public sector banks on whether the RBI would yield to pressures in view of intervention costs. Instead, bankers said that the options now likely are to further raise the quantum of market stabilisation scheme securities for mopping up excessive liquidity.

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