Cut gilt exposure: Govt to banks

Finance ministry to insist on more retail, infrastructure lending

The finance ministry has decided to ask public sector banks to reduce their investment in government securities and instead offer new investment avenues to retail investors besides enhancing credit flow to agriculture and infrastructure projects.

According to a roadmap to be discussed with bankers, the government proposes to ask banks to strengthen risk mitigation measures, improve treasury management and increase the focus on fee-based activities.

The issue is expected to be discussed on Thursday, when Finance Minister P Chidambaram meets nationalised bank chiefs. The government and the Reserve Bank of India have taken a stern view of the high investment levels by banks in statutory liquidity ratio instruments.

At the end of March, it was estimated at 35.81 per cent, against the prescribed 25 per cent.

A higher proportion of funds, if used up for investment instead of being given as loans, affects both banks and economic activity, an official said.

"During the last five years or so banks had aggressively invested in government securities since bankable projects were not coming their way for investment. But with yields hardening, it makes more sense to lend aggressively," said a banker.

The government's stand emanates from its stance to increase credit flow in the economy since there is sufficient demand from greenfield and brownfield projects. In addition, banks could suffer significant losses on market to market basis, in case yields continued at the current levels.

For instance, yields on 10-year government paper have moved up 144 basis points from 5.15 per cent on May 20 this year to 6.59 per cent on August 19. Any rise in yields from the current levels would aggravate the situation further, a banker said.

The government, which announced a strategy to enhance credit flow to agriculture by 30 per cent during the current financial year, is also not fully satisfied with the progress.

Though data were not available, sources said disbursements during the first four months were not encouraging and banks would be asked to make up for the gap during the rabi season.

Sponsors of regional rural banks are also expected to be advised to liquidate non-SLR investments made by RRBs to increase resources available for lending. The government is also reviewing the progress made by the inter-institutional group for infrastructure credit.

The group comprises Industrial Development Bank of India, Infrastructure Development Finance Company, ICICI Bank, Life Insurance Corporation, Punjab National Bank and Bank of Baroda.

Financial institutions and LIC will take long-term exposure while banks can take the initial maturities.

The participation of pension funds in the IIG, which will make available funds for projects of over Rs 100 crore at 2 per cent below the prime lending rate, is also proposed to be explored along with the option of takeout financing to support banks.