Banks avert yield rise impact; shift focus to loan portfolio

Though fiscal 2004-05 is drawing to a close, commercial banks are not making any noise over the rising bond yields and its impact on their treasury profits. This is because currently their focus is on the loan portfolio rather than investments.

The yield on the benchmark 10-year, 7.38 per cent paper is ruling at around 6.70/72 per cent.

In order to grow the balancesheet on the asset side, banks have been advising their corporate clients to lift the sanctioned credit.

Usually when corporates could not finish their credit limits at the year-end, they roll it over to the next fiscal.

With increased disbursements, the credit portfolio will go up, thus reflecting an increase on the asset side of the portfolio, even as the investment pile shrinks. This has been the trend among all banks along with their efforts to increase deposits, said a public sector banker.

Most of the corporate clients prefer putting their short-term funds with mutual funds as they get a tax break and there is a limitation on the exit period.

Bank investment in government securities have gone down drastically during the current fiscal with the sharp rise in interest rates. For the financial year so far banks' investment in government securities has fallen to 9.1 per cent as against a rise of 25.2 per cent last year.

Correspondingly, bank credit has gone up by 27.2 per cent as against a 12.8 per cent rise in last fiscal.

Banks have been cautious about their investments due to several reasons. There is increased demand for credit in the form of loans. Since there is no market valuation for the loan portfolio, there is an urge among bankers to prefer loans rather than market investments.

On the other hand, the yield on the 10-year benchmark 7.38 per cent 2015 paper has gone up by almost 165 basis points in response to the monetary measures adopted by the apex bank to curtail inflation and the global rise in interest rates.

Instead of stressing on profit or loss, banks have been focussing on expanding the balancesheet size.