Inaction may harden bond yields by three or four basis points
The cut-off yield at government bond auctions may be higher by three or four basis points, as the Reserve Bank of India has not accepted the demand for an increase in the limit on securities kept in the Held to Maturity (HTM) category.
At present, banks are permitted to hold statutory liquidity ratio (SLR) securities up to 25 per cent of their demand and time liabilities (DTL) in the HTM category. Banks do not need to mark the investments under HTM to market (meaning, they do not have to keep revaluing these at market prices). So, they are saved from making provision for any erosion in the price of these bonds.
“Recently, there has been some debate on the need to raise this limit on the ground that such a relaxation will mitigate the upward pressure on yield on government securities, and, consequently, on the overall interest rate regime,” RBI said in the second-quarter review of annual policy.
A senior official with State Bank of India, the largest lender, and which had spearheaded the demand for a hike in the limit, said, “Bank is ok with regulator’s decision. Banks will have to be very thoughtful about participating in the government bond auction. The cut-off yield at auction may be higher by 3-4 basis points.”
The issue became crucial for some banks, especially SBI, whose government bond portfolio was almost reaching the HTM limit. Any further exposure to government bonds in excess of the HTM cap will have to be marked to market. Banks will have to provide for a drop in bond prices, making a dent in bottom line.
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The huge government borrowing programme meant public sector banks had to subscribe to securities. Being in the midst of an economic slowdown, banks have to park deposit money in securities for want of credit deployment opportunities.
RBI said it considered the advisability of raising the HTM limit. It may be recalled that in 2004-05, banks were allowed to shift SLR securities to the HTM category as a one-time measure, subject to the total SLR securities held in the HTM category being capped at 25 per cent of their DTL.
This limit was kept unchanged even as the SLR was reduced from 25 to 24 per cent in November 2008. As the HTM ratio is already higher than the prescribed SLR, it is not considered desirable to further raise the HTM ratio.
A treasury head of a small private sector bank said RBI is trying to say, do not ask me (the central bank) to protect your bottom line.
The risk from price erosion has subsided, since the government has completed 80 per cent of its scheduled market borrowings in the first half of the financial year. The balance 20 per cent could be managed comfortably in the second half, on the back of a better liquidity situation.