Exposure to G-secs set to take a toll on lenders

With credit growth still muted, banks heavily investing in government securities are now staring at rising marked-to-market losses. With deposits flowing steadily, owing to attractive interest rates, and not many takers for loans, investment in government bonds rose 13.34 per cent during the first six months of this financial year, compared with 6.5 per cent in the same period of the previous year. With bond prices falling, banks have to make provisions on their investments, which would deplete its bottomline.

Banks are mandated to hold at least 24 per cent in the form of government securities as statutory liquidity ratio (SLR). Currently, banks hold three-four per cent more than what is required.

That most of the resources of banks are now parked in bonds is also evident from the falling credit-deposit ratio. According to Reserve Bank of India (RBI) data, the incremental credit-deposit ratio was 47 per cent in the April-September period. This means banks were not able to deploy even half the funds availed of through deposits in lending. Last year, the ratio was 83 per cent, when banks were borrowing from sources other than deposits to support the high demand for loans.

While attractive interest rates have led bank deposits to post a six per cent growth in September, compared to March, higher lending rates have resulted in a slower credit offtake, at four per cent, during the same period. “Deposits flow into investments when credit growth is lower than expected, and banks’ SLR investments tend to rise temporarily. But this would come down as credit growth gets more pronounced, going ahead,” said M Narendra, CMD, Indian Overseas Bank.

However, this may not be a good time to stay over invested in government bonds, considering the way markets are reacting to the government’s decision to borrow more than planned. "None in the system expected yields on ten-year bonds to go past 8.5 per cent, thus getting everyone on the wrong foot. Now, the nine per cent mark is just at a striking distance, after posting a swift move from 8.40 per cent. It would be very difficult for RBI to run its auction programme for the second half," said Moses Harding, head (global markets), IndusInd Bank.

Bond yields shot up by 10 basis points on the last trading day of the second quarter, following the announcement of the borrowing plan. Since then, yields rose by 26 basis points. "Currently, our SLR portfolio is 26-27 per cent. With a spike in yields, there are issues of making provisions," said S Raman, CMD, Canara Bank.

A senior treasury official with a public sector bank said the incremental investments would take place in equal proportion—in treasury bills and long dated papers. "The exposure to treasury bills would help address the issue of liquidity. As for long dated papers, there is the expectation that yields, say for the 10-year paper, would move fall to around to 8.5 per cent in the later part of the quarter. So, even if we pick up the paper at a higher yield now, it would be money on easing of yield," he added.

Bankers said the rising yields would not affect the held-to-maturity (HTM) portfolio of banks. “There is a benefit in picking up securities at higher yield levels, as this would improve the average yield of the bond investment portfolio in the HTM category. It would also bring benefits when the yields start moving down, which may happen early next financial year," said Raman.

Bankers are hopeful credit growth would pick up in the second half. "Now that we have entered the festive season, credit growth would pick up, as working capital needs go up on account of the rise in input prices,” said Narendra. The banking industry as a whole will be able to touch 18 per cent credit growth this financial year as projected by RBI, he said.