Amid low credit offtake, SLR securities attract banks

With lower-than-expected credit growth in the initial quarters of the current financial year, banks have opted to deploy unused funds in government bonds instead.

As on July 15, banks had invested Rs 1.72 lakh crore in statutory liquidity ratio (SLR) securities, more than double the Rs 57,199 crore given as loans since April. In the corresponding period last year, incremental bank credit was Rs 1.19 lakh crore, while SLR investments rose by Rs 75,897 crore, according to data from the Reserve Bank of India (RBI).

To maintain SLR, banks need to invest 24 per cent of net demand and time liabilities (NDTL) in government securities. Bankers say most banks hold two to four per cent excess SLR securities than what is mandated.

“Since credit pick-up did not happen according to the sanctioned limits, we had to make alternative investments like bonds and mutual funds,” said D L Rawal, chairman and managing director, Dena Bank.

Deposits with banks rose by Rs 2.13 lakh crore, owing to the rise in interest rates.

To maintain the minimum SLR, banks are mandated to invest 24 per cent of NDTL in government securities, against which banks currently hold 26-28 per cent.

Bank investments are also guided by a feeling that interest rates are nearing peak levels. “When interest rates move up, there are chances of more delinquencies. It is preferred to invest in safer and liquid assets like government bonds, and we get an opportunity to book profits once yields cool,” said the treasury head of a large public sector bank.

However, the scenario may worsen if yields continue to rise, as these investments would be revalued. Yields across tenors have hardened by up to 50 basis points since April. As a result, banks had to make higher provisions for the depreciation in investments in the first quarter. Bank of India, for instance, made provisions of Rs 90 crore, compared with Rs 0.5 crore a year ago.

Analysts expect bank credit to pick up in the second half. “Usually, credit growth is higher in the third and fourth quarters, as was the case last year,” said a banking analyst with a domestic brokerage. As on July 15, bank credit rise 19.33 per cent, compared to the same period last year. In the first quarterly review of the monetary and credit policy, RBI had lowered its credit growth projection from 19 per cent to 18 per cent for 2011-12.