Rate impact: treasurers weigh gilts' portfolio reshuffling

With interest rates moving up faster than expected, bank treasurers are seriously looking at the option of transferring statutory liquidity ratio (SLR) securities to the 'held to maturity' (HTM) category.

Reshuffling the securities portfolios from held for trading and available for sale to the HTM will mean the securities will then be shielded from the impact of the adverse interest rate movements in the market.

The crucial element is the timing of the transfer on which will depend the quantum of provisioning required. Interest rates have been steadily going up with the yield on the 10-year government security closing at 7.18 per cent on Thursday, up 198 basis points over a six-month period.

After the latest RBI credit policy the 7.37 per cent 2014 paper has hardened by as much as 43 basis points. The yield on the paper is predicted to remain at 7.00-7.25 per cent levels as the inflation is expected to inch up to eight per cent levels as the recent hike in domestic oil prices get factored in.

About two months back, the RBI announced a scheme whereby banks can transfer SLR securities from the trading book to the HTM book before the year-end.

This was a one-time option made available to banks to protect their investment book from the impact of rising rates. The scheme mandates that banks provide for the difference between the market price and the acquisition price of the transferred securities.

In other words, a treasury manager's outlook on interest rate will determine when a bank wants to effect the shift in portfolios.

"In case interest rates worsen, we will have to carry out a transfer. We are constantly watching the situation," State Bank of India (SBI) chairman AK Purwar said.

SBI is one of the banks which has not yet done the transfer. If it takes the plunge, other big public sector banks may follow suit.

The big names that have not yet carried out a transfer include SBI, ICICI Bank, Bank of Baroda, Canara Bank, Union Bank of India, Oriental Bank of Commerce, Dena Bank, Central Bank of India, Uco Bank among others.

Bank of India, Corporation Bank, Punjab National Bank, Andhra Bank, Indian Overseas Bank, Syndicate Bank, Allahabad Bank, HDFC Bank and UTI Bank have availed of the RBI option and transferred securities in the second quarter.