Banks shrink bond kitty to stem losses

Move to ward off impact of higher rates on balance sheets.

Rising interest rates have forced public sector banks to drastically pare their government securities portfolios. The idea behind this move is to ward off the impact of higher interest rates on banks' balance sheets.

As the bond yield rise and prices of securities go down, banks are required to provide for depreciation in their bond portfolios.

Collectively, government securities' holdings of 25 public sector banks declined 8.96 per cent in 2005-06. In absolute terms, the portfolio was worth Rs 491,758 crore as on March 31, 2006, down from Rs 540,137 crore in 2004-05.

These banks have used their entire investment fluctuation reserves (IFR) of Rs 17,000 crore to cushion the depreciation in bond prices.

The IFR was created over the last few years out of appreciation of bond prices in a declining interest rate scenario. These banks also pumped up provisions for depreciation of investments by Rs 6,912 crore to Rs 12,836 crore in 2005-06.

State Bank of India pruned its government bond portfolio by 21.2 per cent or Rs 36,666 crore and Punjab National Bank cut it by 18.2 per cent or Rs 7,777 crore.

State Bank used its IFR worth Rs 5,254 crore and PNB Rs 1,902 crore to cushion the impact of rising interest rates on their balance sheets.

Bank of Baroda, Bank of Maharashtra and Syndicate Bank cut the bond portfolios by over Rs 3000 crore each. In contrast, Union Bank raised it by Rs 3,923 crore, Bank of India by Rs 2,780 crore, Canara bank by Rs 1,629 crore and UCO Bank by Rs 1,305 crore.

As a fallout of the large scale sale of government bonds, the statutory liquidity ratio (SLR) of 25 public sector banks has come down from 38.73 per cent to 31.4 per cent.

The decline in banks SLR holding is on account of rise in deposits and fall in investment in government securities. Banks are required to maintain a minimum 25 per cent of deposits in SLR securities.

Of the 25 PSBs studied here, as many as eight banks have SLR of over 35 per cent per cent each while SLRs of five other range between 30 per cent and 35 per cent. Twelve others have brought down their SLR holdings between 25 per cent and 29 per cent.

Banks with low SLR includes, Bank of India, Canara bank, Corporation Bank and Union Bank. State Bank of India which sold securities worth Rs 36,666 crore in 2005-06 witnessed a stiff fall in its SLR holdings from 45.85 per cent in 2004-05 to 35.60 per cent in 2005-06.

"Between 2000 and 2004, all banks chased government securities and made handsome treasury profits in a falling interest rate scenario. The scene is very different now. They are cutting down their bond portfolio to arrest losses on account of depreciation. Besides, they also want to release resources to build loan assets," said a banking analyst.