The Hindu Business Line : Bankrolling of Govt borrowings slackening

BANKS have always funded most of the government borrowings. Regulatory requirements on banks to invest in Government paper and Government ownership in banks have combined to fuel a cosy and incestuous relationship.

At the end of March 2003, banks owned nearly 60 per cent of the outstanding Union and State Government securities.

This financial year, however, may turn out to be vastly different.

At the end of November 2004, net investments of scheduled commercial banks in Government securities so far in this financial year were only about Rs 9,000 crore.

The Union Government alone, however, had borrowed about Rs 59,000 crore.

This works out to a proportion of about 15 per cent, the lowest in the past decade.

Then, who funded the Government?

Entities other than banks such as insurance companies - especially the Life Insurance Corporation - primary dealers and mutual funds may be the primary investors, either directly or indirectly, in the borrowing programme of the Union and State Governments.

Top primary dealers also pointed to the depth in the market now, which has enabled the Government to borrow without significant participation by the banks.

It is not as if banks had stayed away from auctions of Government securities. They have not.

They have, however, offloaded their holdings subsequently in the secondary market.

For instance, bank investments in Government securities were about Rs 40,000 crore at the end of September 3. This declined to bank disinvestments of Rs 1,500 crore by November 12 only to pick up to about Rs 9,000 crore by end-November.

Is this a structural change? Most observers of the Indian economy are emphatic that this is not. Dr Subir Gokarn, Chief Economist, Crisil, indicated that this is not a structural change.

Agreeing with this view, Mr A. Prasanna, Vice- President and Debt market analyst, ICICI Securities, said that this was an abnormal situation caused by a volatile interest rate environment against the backdrop of inflation shocks.

Both said that the spectacular growth in loans and rising yields in Government paper also reduced the appetite of banks for government securities.

Would banks be forced to support the Government borrowing programme in the next three months? Would Government borrowings crowd out the private sector?

Dr Gokarn said that to use the word support is itself misleading and that there is no evidence that the private sector is being crowded out.

He said if that were the case then the yields on Government securities would be far higher than they were now.

Dr Gokarn added there might not be any liquidity problem during this year because of many reasons.

According to him, the inflow of funds from abroad has been good and the Government itself is sitting on large cash surpluses. Mr Prasanna said that the debt swap exercise conducted by the Central Government also helped the government to borrow less.

Will banks stop funding the government? Unlikely, says Mr Prasanna who expects them to come back to the market a while later.

More Stories on : Banking | Debt Market | Govt Bonds

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