The Hindu Business Line : G-Secs losing allure for banks

An indication of this is the fact that investment by scheduled commercial banks in Government and other `approved' securities during the current fiscal up to October 1 has been only to the tune of Rs 27,435 crore, against Rs 76,705 crore in the corresponding period of 2003-04.

The dampened enthusiasm for parking their funds in gilts means that for the first time in many years, the outstanding investment-deposit ratio of banks has dipped to 44.04 per cent, from the end-2003-04 level of 45.04 per cent.

The last time this happened was in 1998-99, when the ratio fell to 35.66 per cent, from 36.54 per cent in the previous year, after which it steadily rose to peak at 45.04 per cent last fiscal.

In fact, the dip in the investment-deposit ratio this fiscal would have been more pronounced, but for the lower deposit growth recorded by banks. Aggregate deposits during the current fiscal have so far gone up by just Rs 95,598 crore, compared to an increase of Rs 1,06,782 crore in the same period of 2003-04.

The diminished craving for sovereign paper is significant because it comes notwithstanding a perceptible increase in primary auction yields during this fiscal. To illustrate, between 1998-99 and 2003-04, the weighted average cost of the Centre's market borrowings fell from 11.86 per cent to 5.71 per cent, though this did not deter banks from investing increasingly in Government securities.

At the end of 2003-04, banks' total gilt holdings stood over Rs 2,58,000 crore in excess of their Statutory Liquidity Ratio requirements.

The situation has, however, changed markedly in recent months. In the latest auction on October 11 of an 11-year paper, the cut-off yield was 6.99 per cent, which was way above the 5.79 per cent on a 24-year loan that the Centre raised only on May 6. But despite the higher interest rates offered, the Centre's market borrowings (in gross terms) have been just Rs 74,000 crore so far during 2004-05, whereas last fiscal, by this time, it had already mopped up Rs 95,000 crore.

The reason why banks have turned indifferent to investing in gilts has essentially to do with the pick-up in credit demand from corporates and other commercial borrowers. Non-food credit has expanded by Rs 92,443 crore during the current fiscal up to October 1, which is more than twice the corresponding Rs 41,034 crore incremental figure for 2003-04.

Till last year, there were no real takers for bank funds. But now, with the ongoing industrial recovery generating alternate avenues for lending, banks are no longer desperate to put their money in Government paper. Currently, it is a case of the Government being `crowded-out' by other borrowers. The danger in the coming days would be if things turn out the other way - a recipe for an all-round increase in interest rates.