The Hindu Business Line : Banks shifting to short-term papers

Top bankers said that they were shifting their investment preference to short-term securities, including Treasury Bills. Currently, banks’ investment-deposit ratios are quite high — at over 30 per cent on a nominal basis and close to 90 per cent on an incremental basis. Banks are expected to invest only up to 24 per cent of their net demand and time liabilities in mandated SLR (statutory liquidity ratio) eligible Government securities.

The diminished interest in long-term G-Secs is evident from the high spreads between one-year paper and 10-year paper. The spreads are currently about 245 basis points for five-year securities and 290 basis points (bps) for 10-year securities. The rising spreads, bank officials said, in turn implied that the Government would have to bear higher costs on its incremental borrowings for the rest of the year. This year, the Government’s revised gross borrowing target is Rs 4.51 lakh crore. Till last week, only about 44 per cent of the borrowing target has been met.

Low interest

The aversion for long-term securities is also apparent from the shrinking ‘bid to cover’ ratios. This ratio measures the demand for securities at an auction. High ‘bid to cover’ ratios implies good demand and vice versa. At the last week’s auctions, the ‘bid to cover’ ratio for the long dated 7.94 per cent 2021 security was below two times, implying low interest in the security. In fact, the average ‘bid to cover’ ratio has been shrinking since the beginning of this financial year. In May, when the borrowings were stepped up to Rs 15,000 crore per week, the ratios averaged between three and 3.2 times. But since last week, the ratios were down to 2.1 times. On the other hand, the ratios at the 91- day T-bill auctions remained close to three times, indicating the preference for short-term bills.

State Govt loans

The aversion for long-term securities is already beginning to impact State Government loans. State Development Loans or market borrowings by States are seeing high yields — spreads of close to 85-90 basis points over comparable 10-year sovereign issue yields. Besides, the spreads over one-year yields for SDLs are well above 350 bps over the one-year securities, indicating little interest in these securities.

Bank officials said the preference for short-term securities normally takes place, when liquidity is expected to tighten. This is because short-term securities are treated as more liquid than long-term securities. Besides, bankers said, they preferred to wait for securities to offer high yields, implying availability at low prices. This, they said, would also help beef up their net interest margins, which are under pressure on account of low credit off-take.

Derisked investment portfolios implied that the banks preferred to keep the average duration of their security portfolios low. The average duration for the PSU banks is currently only about three years, a level that has been held since 2004.

Most of them had then taken losses after taking advantage of the RBI’s guidelines permitting them to shift up to 25 per cent of their demand and time liabilities as held-to-maturity (HTM) category investments. Only the incremental portion of their securities beyond the 25 per cent was treated as marked-to-market. In non-PSU banks, the residual duration is barely one year.

The short duration is also intended to cut depreciation losses in the event of a sharp spike in yields or a downturn in G-Sec prices.

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