Bank investments in shares surged 39% in last financial year

Rising interest rates have had an obvious fallout on the investment pattern of banks. Their investments in shares have risen b 38.72 per cent, while that in corporate debt has fallen in 2004-05.

As per the latest weekly statistical supplement of the Reserve Bank of India, investment by banks in stocks increased by Rs 3,356 crore from Rs 8,667 crore to Rs 12,023 crore as on March 18, the last reserves reporting Friday of the year.

In contrast, their share of investments in bonds and debentures decreased by Rs 1,530 crore "" or 2 per cent "" from Rs 76,549 crore to Rs 75,019 crore.

Banks shunned corporate debt for equity instruments on the back of a 16 per cent rise in the bellwether share index Sensex in 2004-05.

"Stock market has gone up by 15 per cent year-on-year and every scrip value has increased by 10-15 per cent. Banks would definitely want to increase their investment in shares to make more money," a treasury official at a private bank said.

The benchmark 10-year government bond yield rose to 6.67 per cent as on March 31 from 5.16 per cent last year. According to bankers, while investment pattern of banks indicates the preference for equity, it wasn't linked directly to rising bond yields.

"There is no conscious strategy by the banks to shift their investment portfolio in favour of equity investments, a dealer at a state-owned bank said.

"Historically, banks have been more interested to invest in primary market. The state-owned banks have invested a lot in the public issues and therefore the equity investment basket has grown," he said.

As per Prime Database, companies raised Rs 16,047 crore through public share issues during April-January.

But some bankers said the limiting factor for bank investments in equity would be the Reserve Bank of India's rule that says investments in equity can't exceed 5 per cent of their net demand and time liabilities.

"The focus on bonds will remain. Banks have to invest a minimum of 25 per cent of their NDTL in government bonds anyway. There is a limit to which banks can invest in equity," he said.

For the banking sector as a whole, equity investments on March 18 were only less than 1 per cent of their net demand and time liabilities of Rs 17.19 trillion.

"A strengthening economy means good news for equity and bad news for debt as interest rates often rise," the chief dealer of primary dealership said.

"Banks will look for alternative investments and that could mean a rising preference for equities," he added.