C. Shivkumar

Bangalore, Jan. 11

BANKS have pushed down their Government security investments to less than 35 per cent of their deposits in a bid to boost earnings.

Bankers said most of them were bringing down their average investment-deposit ratio as close as possible to the current statutory liquidity ratio of 25 per cent. Some of the private banks have already managed to bring down their ID ratios close to 30 per cent. The drop in the ID ratios is the lowest in almost two decades.

Despite the surge in deposits, bankers said, most of them preferred to stay away from Government securities for the moment, since they were already SLR-compliant. But the low preference for G-Secs was also driven by low yields. Credit, on the other hand, generated better returns. Average yield on credit was upwards of 10 per cent, bankers said.

The maximum yield on G-Secs, on the other hand, was only about 7.5 per cent for long-term securities 30-year tenor. But bankers said few of them were interested in long tenor securities. Instead most have shrunk their maturities to under 3 years in a tight liquidity situation. This was also done for liquidity purposes, since shorter tenor securities tend to be more liquid than long-tenor securities.

Besides, bankers said, the shift to the short-tenor securities was also triggered by deposit accretions, mostly of short maturities about a year.

The bankers' credit preference also stemmed from the reduced lending risks after the passage of the Securitisation Act two years ago. This had improved loan recoveries and stemmed accretions to non-performing assets portfolios. Further loan recoveries had also improved, translating into better capitalisation. Banks are currently operating on an average capital to risk weighted asset ratio of over 12 per cent, as against the mandated 9 per cent. This high ratio accordingly allowed them to raise the level of their respective risk weighted assets profile

As a result, even the incremental deposit accretions were finding their way into credit, bankers said. This is evident from the incremental investment deposit ratios that are already negative for the banking industry. In fact, in the last weekly statistical supplement of the Reserve bank of India, the incremental investments have actually shown a negative growth of 1.1 per cent. Since the beginning of the financial year, deposits have grown by about Rs 2,38,000 crore. Investments for the same period actually dropped by a little over Rs 11,000 crore.

In addition to the deposits, bankers said, they also resorted to collateralised borrowing and lending obligations (a form of inter-bank ready forwards) for raising liquidity for credit. The increased credit deployment had allowed the banks to improve their interest earnings, and accordingly their bottomline, the sources said.

(This article was published in the Business Line print edition dated January 12, 2006)
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