Banks offload illiquid gilts

Banks have embarked upon a wave of selling of illiquid securities by banks in the bonds market as they want to book profits with financial year 2004-2005 drawing to a close.

Illiquid papers are mainly being offered to provident funds and trusts who are busy looking for investm ent avenues.

Dealers said the mostly highly traded papers today were the 10.47 per cent 2015 and 10.71 per cent 2016. The volume of trade in illiquid securities was close to Rs 150 crore and dealers expect this to go up in coming days.

Illiquid gilts offer a lucrative choice in terms of the yield differential. Sources added that corporate bonds also offer a better choice but that market is too illiquid and non-transparent.

The Reserve Bank of India has allowed banks to transfer their SLR securities into the held to maturity (HTM) category of their treasury portfolio.

This is a one-time measure, announced by the Indian central bank, to help banks partially insulate their trading portfolio from interest rate risk. Banks are required to mark to market their bond portfolio except for those held under the HTM category.

According to a dealer, most public sector banks have started offloading their illiquid securities in the market to book profits at a time when market conditions are conducive. "Interest rates may go up further. So the banks are in a hurry to book profits now," said one dealer.

"Oil prices have gone up to around $ 55 per barrel and this might affect the inflation rate and consequently interest rates. The yields on government paper in the US have started going up," said a dealer at a public sector bank.

In order to develop the corporate bond market, banks had been asked to take exposure to below triple-A papers at a meeting held under the aegis of the Fixed Income Money Market and Derivatives' Association over the weekend in Hyderabad. Banks will earn a decent yield differential in terms of the spread from these papers.

Moreover, the fear of a loan turing bad has substantially gone down, given the recovery and loan settlement mechanisms of banks and financial institutions.

Provident funds are today buying government securities in order to meet the stipulated investment pattern. "Most provident funds tend to wait till the end of the year to invest in gilts as these offer the least returns as opposed to other investment options," said Amit Gopal, vice president India Life, which manages over 150 provident funds.

According to the investment norms, these funds have to invest a minimum of 25 per cent of incremental funds into gilts, and can take this figure up to 55 per cent.

While this investment is most secure, returns are pittance and thereby making it difficult for corporate PF trustees to meet the regulated 9.5 per cent assured annual return to employees.