Banks breathe easy as bond yields may stay range-bound

The first quarter of the current financial year has started on a promising note for banks.

The fear that a further rise in sovereign bond yields will lead to policy tightening by the central bank has now been allayed. Banks think the demand for government bonds and comfortable liquidity may not push yields significantly during the quarter. A rise in yields would have forced banks had to make higher mark-to-market provisioning on their bond portfolios. Now, banks will not be hard-pressed for resources as credit growth is expected to pick up later in the financial year.

“A lot of short-term loans are given during the last fortnight of March in order to meet year-end targets. These get liquidated in the first quarter. As a result, real credit growth in first quarter may not happen, but for the full year, credit growth will be better than the previous financial year,” said an executive director of a large public sector bank.

The huge portfolio investment that is coming into the Indian equity markets has made banks confident about comfortable liquidity. In March, foreign institutional investors put in around $4.4 billion in India, helping stock markets hit a two-year high.

“Yields have an upward bias but may not harden too much in the short term. Liquidity is still very strong and is expected to be there in the system. For real credit pick-up, we should wait for some more time. Yields may range between 8-8.1 per cent in the short term” said MD Mallya, chairman and managing director of Bank of Baroda.

“In our case, not much MTM provisioning is required and the duration is low,” he added. The modified duration of the bank’s available-for-sale (AFS) investments is 2.18 years, as of December.

Bank of Baroda’s 79.45 per cent SLR securities were in the held-to-maturity (HTM) portfolio while 19.94 per cent were under AFS as on December-end. The share of SLR securities in total investment was 86.91 per cent. During the fourth quarter of 2009-10, the yield on the benchmark 10-year paper hardened 26 basis points and closed at 7.85 per cent on March 31. Analysts suggest some banks may have to make high provisions on their bond portfolio.

According to a report by broking firm Motilal Oswal, both State Bank of India and ICICI Bank are likely to post mark-to-market losses on their bond portfolios. Today, the yield on the 10-year benchmark paper closed at 7.86 per cent, up 6 basis points from its previous close.

The demand for government bonds will also ensure that yields stay range-bound even if the Reserve Bank of India (RBI) raises the policy rate and the cash reserve ratio to suck out liquidity to check inflation.