From March this year, the RBI has been gradually bringing down the SLR requirement (statutory liquidity) — government securities held by banks — in a phased manner. From 21.5 per cent of net demand and time liabilities in the beginning of this year, the SLR requirement is down to 20.75 per cent now. But public sector banks that continue to witness a weak credit off-take still hold at least 2-3 per cent more than the mandated requirement.

Data from the Clearing Corporation of India (CCIL) shows that PSU banks have in fact remained net buyers in government securities in the September quarter to the tune of about ₹31,380 crore. This is much higher than the ₹18,000-odd crore of net purchase they made in the June quarter. A sharp fall in bond yields this year alongside RBI’s accommodating policy stance has kept banks’ appetite for government bonds good. As core lending business remains muted, PSU banks have been looking to bump up their treasury income. Banks also like to carry excess investments, due to the comfort of parking funds in highly safe assets, which can be used as collateral to borrow from the RBI.

Making hay The strategy to buy government securities is expected to aid PSU banks’ earnings in the September quarter. The yield on government bonds have fallen from 7.7 per cent levels in the beginning of this year to 6.7 per cent levels. This is likely to lead to higher income from treasury gains for all banks in the September quarter, as much of the fall in yields have happened during this period. While PSU banks have been net buyers for the September quarter, they have sold government securities to the tune of about ₹16.26 lakh crore, according to CCIL data. This is nearly double the amount they sold in the June quarter. Most PSU banks had raked in hefty treasury gains in the June quarter as well. Bank of Baroda for instance had gained about ₹557 crore on sale of investments while Canara Bank had made a tidy sum of ₹607 crore. Allahabad Bank, Andhra Bank, Bank of India, Corporation Bank and IDBI Bank are among the few that saw a sharp sequential rise in treasury gains during the June quarter.

Banks can also gain from the reversal of the MTM provision on AFS portfolio (available-for-sale) as compared to the increased provisioning in earlier quarters. Since January this year, banks have been mandated to align their HTM (held-to-maturity) portfolio with the total SLR requirement. Banks that carry excess SLR, can park the surplus in the AFS book. Banks have to mark-to-market investments held under AFS at quarterly or at more frequent intervals. Many PSU banks had reported provisions on investment depreciation in the June quarter— Dena Bank (₹60 crore), IDBI Bank (₹118 crore), Syndicate Bank (₹59 crore), Bank of Baroda (₹19 crore), Canara Bank (₹17 crore) — to name a few. Many banks could see a reversal on provisions in the September quarter.

With falling bond yields, few PSU banks have also seen a rise in the AFS book in the past quarter. And as per the norms laid down by the RBI, banks can shift securities to or from HTM only once a year, normally at the beginning of the accounting year. BOI for instance, shifted securities worth ₹13,854 crore from HTM to AFS portfolio in the June quarter.

Banks having higher surplus on their SLR holdings will clock in higher gains. Bank of Baroda’s SLR stood at 26.8 per cent in the June quarter, while that of Allahabad Bank, Bank of India, Bank of Maharashtra and Punjab National Bank stood at 22-23 per cent.

On a selling spree While PSU banks have been net buyers, private sector banks have turned net sellers in the September quarter. They have net sold about ₹21,000 crore worth of bonds after a net purchase of ₹5,300 crore in the June quarter. Foreign banks, on the other hand, had already turned net sellers in the June quarter. These banks net sold bonds worth ₹34,800 crore in the June quarter and ₹16,000 crore in the September quarter.

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