C. Shivkumar

Bangalore, Oct. 3

BANKS have stopped liquidation of their investments and switched over to deposit mobilisation instead to fund credit growth.

Bankers said that there was little necessity to sell their investments for funding credit offtake despite having high investment-deposit ratios. Currently, investment-deposit ratios were in the region of about 42 per cent for most banks. In fact, the weightage of SLR (Statutory Liquidity Ratio) securities was close to about 98 per cent in their respective investment baskets. The remaining investments comprised on non-SLR securities - debentures, bonds and some equities.

Bankers said that one major reason for restrained activity was that most of them had already completely derisked their investment books. Bankers said the average maturity of their marked-to-market securities, which included both the available-for-sale and the held-for-trading categories, was less two years. Some of the more aggressive banks had brought it down to just one year.

Tightening liquidity

The reduced maturities in turn, bankers said, would considerably reduce the impact of depreciation when yields rise in the coming months, an event which most banks expect to happen after the credit policy for the peak season is announced. A hint of the tightening liquidity situation was evident from the reduction in the Market Stabilisation Scheme (MSS) amount notified at Rs 1,500 crore during this week's auctions. Till last week, the MSS amount notified used to be Rs 3,500 crore.

In a tight liquidity situation, market prices of securities with longer maturities tend to fall (or yields rising). Already 10-year yields are on the ascent and are now about 7.14 per cent. Interestingly, this rise was taking place just after the bankers concluded their second quarter or the first half yearly results. At that point, the 10-year yield was under 7.10 per cent, almost in line with the first quarter. Bankers said that as a result, the bottom lines of most banks were expected to be healthy.

Besides, bankers said that the major reason their reluctance to sell their holdings in the markets also stemmed from the shift in focus to increasing their liabilities to fund the 30 per cent plus year-on-year non-food credit growth. They said the high ID ratio gave them substantial flexibility to push up their deposits, without raising their investments.

Most of them said even some the existing long term securities could be pushed into the held-to-maturity category, as permitted by the Reserve Bank of India in the guidelines issued last year. Those guidelines had permitted the banks to hold HTM securities up to 25 per cent of their demand and time liabilities. Consequently, more of the existing securities would move into the HTM category taking away the impact of future depreciation as well, they said. This would also help them to progressively reduce the ID ratios and align it closer to the prescribed SLR, they added.

Insurers hurt

This reluctance to sell by the banks, which are the largest investors in securities, has created a problem of sorts for some of the life insurance companies. Life insurers traditionally have a large appetite for long-dated G-Secs for matching their liabilities. Life insurers are now being pushed to offering higher prices for long-dated securities in the secondary markets due to their short supply. This was leading to a flattening of the yield curve at the long end. Besides, many of them are also beginning to switch over to the primary markets, bidding at the RBI's auctions of dated securities. At the last placement of State Government securities, the yield was 7.45 per cent or a spread of just 35 basis points over the 10-year yield.

(This article was published in the Business Line print edition dated October 4, 2005)
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