Financial Daily from THE HINDU group of publications
Tuesday, Sep 13, 2005
Money & Banking
Public Sector Banks
PSU banks have little appetite for govt papers
Bangalore , Sept. 12
PUBLIC sector banks are staying away from government securities in a bid to contain depreciation ahead of the implementation of capital charge for market risk.
Bankers said that most of them are convinced that interest rates are likely to move only northwards.
Accordingly, most of them prefer to restrict accretion of government securities at this juncture especially under the heads "Held for Trading" or "Available for Sale" categories.
In both these categories, banks would be expected to provide for capital charge for market risks effective from March-end 2006.
Exemption from capital charge was likely in the case of securities falling in the "Held to Maturity" category.
Bankers said that if rates move northwards in line with expectations, banks would require additional capitalisation if investments are raised from the current levels. Currently, most banks are at comfortable levels of capitalisation, with the industry-wide average capital to risk weighted adequacy at around 12 per cent.
Instead, bankers said that the focus was to remain adequately capitalised to meet the accelerated pace of credit growth.
For the banking sector as a whole, credit has been growing at annual clip of 30 per cent based on a year-on-year basis. In fact, the entire growth in credit is driven by non-food credit.
Bankers see little reason to push up the investment books at present.
This is because almost all the banks are well over the prescribed statutory liquidity ratio (SLR). The prescribed SLR is 25 per cent of the net demand and time liabilities.
HTM securities under the new guidelines issued last year are expected to be 25 per cent of demand and time liabilities. Most banks have already taken advantage of this one-time reprieve by RBI last year and shifted their portfolios to HTM.
Besides with an investment-deposit ratio of 41 per cent, banks have little interest in pushing up investment portfolios.
This is especially at a time when the downside risks are high. Moreover, bankers said that deposit accretions arestill slack.
Therefore they said there was little need for adding to the existing portfolio of SLR securities.
Instead the preference is to continue liquidating their investment portfolios or carry out switches with the Life Insurance Corporation of India. In fact, it is on account of these switches the 10-year yields remain range-bound.
Ten-year yields are currently at 7.05 per cent and have fluctuated between 7.04 and 7.08 per cent for quite some time.
These switches, swapping long tenor securities for short tenor securities, are sometimes done at slight losses.
But bankers said that these losses are at best notional since many of the securities are still being sold at higher than acquisition prices. Besides, in carrying out such switches, they would be effectively de-risking their portfolios, reducing the maturity profile of their investment books.
The average tenor of the investment books of some of the large banks is barely four years. This is inclusive of securities held in the permanent category.
Bankers also said that many of the large banks are not keen to allow a hardening of yields. Higher yields would imply that some of them would go into the red on account of depreciation for the second quarter.
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