Banks' risk aversion led to higher investment in G-secs: RBI

The concerns of rising Non-Performing Assets (NPAs) has resulted in increase in the risk aversion of banks and this in turn resulted in banks investing substantially in government securities. “As against deceleration in credit growth, banks’ investment in government securities increased substantially.

This trend partly reflected increase in risk aversion by banks with a growing preference to park funds in safer instruments, against the backdrop of weak macro-economic outlook as well as rising NPAs,” said the RBI in its Report on Trend and Progress of Banking in India – 2011-12 on Wednesday.

However, as on March 31, 2012, banks’ investments in non-Statutory Liquidity Ratio (SLR) instruments contracted compared with the corresponding period of the previous year, due to decline in investments in shares and mutual funds, the report said. The SLR is the portion of minimum investments in gilts and other approved securities by banks. It was cut by 1 per cent to 23 per cent in July and implemented in August.

“The decline in investments in mutual funds could be partly attributed to the policy tightening by the RBI in order to curb banks’ exposure to liquid/short term debt schemes of mutual funds,” said the report. But banks’ investments in commercial papers increased sharply to Rs 35,700 crore recording a growth of 90.6 per cent over corresponding period of previous year.

Total loans and advances witnessed moderation in growth compared with the previous year. The deceleration in bank credit was broad-based with credit off-take by all major sectors slowing down during 2011-12. Credit to industry and services sector, which together constituted more than two-thirds of total bank credit, recorded slower growth.