Banks trim gilt exposure as rates rise

Public sector banks are shifting gears by shedding their excess holdings in gilts. Given the robust credit growth and an eye for higher yields, Union Bank of India, Corporation Bank, Dena Bank and Bank of India have taken the lead by paring their exposure to gilts to the bare minimum level of 25 per cent.

This is the mandatory minimum level as dictated by the statutory liquidity ratio (SLR).

Union Bank of India has been the most aggressive in trimming its portfolio as a percentage of total deposits to just over 25 per cent from 32 per cent mid last year.

Corporation Bank has also brought down its holding from 35 per cent to 31 per cent. Likewise, Bank of India reduced its gilts portfolio from 28 per cent to 26.5 per cent.

Dena Bank has also brought down its holding from 38 per cent to 33 per cent.

Public sector banks were earlier criticised for investing 35 to 40 per cent of their total deposits in government securities. As on March 31 2005, the banking system as a whole invested on an average 38.5 per cent of total deposits in government securities.

Since many public sector banks have started adopting the same practice as their private sector counterparts. The practice of over-investing in government paper and ignoring the credit market "" dubbed 'lazy banking' by a central bank deputy governor "" had in the past two financial years yielded banks hefty profits as rates fell sharply and bond valuations soared.

Today the scene has changed. With rates having risen by as much as 2 percentage points on the benchmark 10-year government paper over the last one year, bankers are shifting their focus back to the loan book.

"Credit yields are better than sovereign yields so we have consciously brought down our investments in gilts to just over 25 per cent of total deposits. Earlier, banks were also vulnerable to rate risk and in the danger of having to book a depreciation in case bond prices fell," said Cherian Varghese, chairman & managing director, Union Bank of India. "We are not lazy bankers," he quipped.

With credit growth increasing faster than deposit mobilisation, bankers such as V K Chopra, chairman & managing director, Corporation Bank, sees the imperative need to unlock investments.

"We are focusing on growing our retail and agriculture advances, which makes it necessary for us to unlock investments in government securities to fund asset growth," said Chopra, adding that it was an industry-wide phenomenon.

Corporation Bank today has a cushion of Rs 1,700 crore over and above the mandatory SLR requirement and plans to maintain the headroom for trading purposes.

Larger banks such as Punjab National bank, Bank of Baroda and State Bank of India, however, have not felt the need to unlock their investments as yet.

This is because their incremental deposit growth is sufficient to fund their loan book growth.

"There is also a lack of opportunities to sell in the market today since bond prices are so low. We will sell when we get an opportunity," admitted a treasury official at Bank of Baroda.