'Lenders to chase corporate bonds as new investment rules kick in'

Indian banks will gravitate towards corporate bonds they intend to hold until maturity once new central bank rules kick in next month, as yields are currently elevated and the investments would be spared from market-linked markdowns, treasury officials said.

From April 1, corporate bond investments will be allowed under held-to-maturity (HTM) category for the first time, provided the fair value is disclosed and investments protected from mark-to-market volatility, according to revised Reserve Bank of India rules.

Currently banks can hold up to 23% of their deposits under HTM as investments in government bonds and state debt and this cap will be removed in April.

The current yield spread of more than 50 basis points in favour of corporate bonds makes them an attractive investment.

"From April, for the HTM portfolios, the AAA-rated bonds especially of state-run companies are an attractive bet as they are yielding higher than the state bonds and do not carry much credit risk," VRC Reddy, treasury head at Karur Vysya Bank, said.

The three-year to five-year government bond yields were in the range of 7.06%-7.08%, while state bonds of similar duration yield around 7.38%-7.42%.

In contrast, LSEG's AAA-rated benchmark three-five year corporate bonds were yielding 7.62%-7.70%.

Major beneficiaries would be highly rated and reputed names as banks would avoid even the slightest of credit risk for the HTM segment, the treasury officials added.

The officials have said that bonds of AAA-rated state-run companies such as Power Finance Corp , REC and Power Grid Corp could be the preferred choice.

Alok Singh, group head of treasury at CSB Bank, expects the spread between government and corporate bond yields to ease below 50 basis points, also aided by improvement in liquidity condition.

"Some banks have already started increasing exposure to corporate bonds, and this is expected to rise further as they intend to capture the higher yields," Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap, said.

Corporate bonds of some sectors such as infrastructure companies could benefit further as banks try to meet their priority-sector lending targets by raising exposure to debt, a treasury head of a state-run bank said, requesting anonymity as he is not authorised to speak to the media.