Risk-Averse Private Banks Flock To The Safety Of Bonds
Flush with liquidity but reluctant to take on credit risk, Indian lenders have stepped up investments in bonds.
Flush with liquidity but reluctant to take on credit risk, Indian lenders have stepped up investments in government and corporate bonds.
Private lenders, that have reported earnings for the quarter ended June so far, have shown a sharp jump in their investment books sequentially, while loan books have stagnated.
Data compiled by BloombergQuint showed that investment books for the 13 private banks that have declared earnings rose over 8.6% between the March and June quarters. That compares to a negative growth of 1.5% in their advances book.
On an annual basis, advances for this set of banks rose 6.6% year-on-year, while their investment books grew 13.2% over the same period, according to BloombergQuint's calculations.
With Excess Liquidity Comes Choice
The shift comes at a time the banking system is flush with liquidity. A sharp deterioration in the economy, however, has left lenders reluctant to lend to most segments.
In contrast to loans, investments in bonds can be relatively easier to manage. Apart from investments in safer government securities, banks also prefer corporate bond investments because of their ability to exit these quicker.
“We have not increased our book significantly. What we done is a lot more of treasury investments where yields are lower but they are safer. While we don’t see growth overall in credit, overall balance sheet has grown. The growth has come from safe treasury investments,” said Dipak Gupta, joint managing director at Kotak Mahindra Bank, after the lender's earnings on Monday.
The shift towards bonds is also partly driven by the Reserve Bank of India’s decision to introduce long-term repo operations. Under the LTRO and targeted LTROs, the RBI has provided banks with long term funds, some of which are mandated to be directed towards corporate bonds.
“The RBI has given a direct incentive to the banks to buy government and corporate bonds and abstained from buying these assets itself in a big way so far,” said Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership. “We have seen a record quantum of corporate bond issuances this year as the top issuers are borrowing from markets compared to the banking channel. These factors would drive the size of the investment book.”
Upadhyay said since the banking system is flush with liquidity, lenders do not have much of a choice but to use the excess liquidity to buy assets at the short end of yield curve that still yield a good “positive carry”, especially when credit demand is weak.
According to Jindal Haria, associate director, India Ratings and Research, the deposit flow for the banks has continued to be relatively strong and since they are not extending loans on account of risk aversion, the only avenue is either cash or investment.
“The banks have used investments towards high-rated entities as a replacement for credit earnings. Otherwise, they would incur a negative carry if they hold it in cash or government security holdings beyond the mandatory statutory liquidity ratio requirements,” he said.
Flocking To Government Debt
While some money has gone towards corporate debt, banks are also flocking to the safety of government securities.
As of July 3, total SLR investments as a percentage of total assets stood at 28% against the regulatory mandate of 18%. In July 2019, SLR holdings stood at 24% of total assets. In April, the RBI reduced the SLR requirement by 25 basis points to 18%.
According to a bank treasury official, who spoke on the condition of anonymity, banks can earn a spread of 300 to 500 basis points on government securities and AAA-rated bonds over their cost of funds given the drop in deposit rates.
Anil Gupta, vice president and sector head - financial sector ratings at ICRA, said while banks may be shifting towards bond investments for now, the scenario isn’t ideal.
“Bonds are typically not a preferred route for lending by banks because, apart from credit-risk weights, which are applied to a loan as well as bond investments, bond exposures also require a market-risk weight. Hence, banks would need to provide capital for both weights for such bond exposures,” he said.