Date:01/04/2006 URL: http://www.thehindubusinessline.com/2006/04/01/stories/2006040103810600.htm

Back Treasuries portfolio to drag down banks' profitability

C. Shivkumar

Depreciation charge rises as yields harden

Banks that still have not transferred their excess SLR securities to HTM category, taking advantage of the RBI's one-time reprieve in 2004, are likely to be hit hard.

Bangalore , March 31

Banks are likely to a face a knock on their bottom lines for this financial year with an escalation in depreciation of their investment portfolios.

For 2006-07, the yield for ten-year securities for valuation purposes has been fixed at 7.46 per cent, up from 6.68 per cent for the last financial year by the Fixed Income Money Market and Derivatives Association of India (FIMMDA).

This implies that the depreciation charge of banks would substantially increase.

But banking sources said that this would adversely affect only those banks that still have not transferred their excess SLR (Statutory Liquidity Ratio) securities to HTM (Held To Maturity) category, taking advantage of the RBI's one-time reprieve in 2004.

At that time, the RBI had altered the definition of HTM investments to 25 per cent of demand and time liabilities instead of investments.

Most public sector banks (PSBs) and a few private sector banks had taken advantage of the RBI's change in nomenclature barring a few large PSBs and private banking entities.

After making this transfer, bankers had incurred large depreciation at that point of time.

`We stand to benefit'

Bankers said even existing securities in the Available for Sale/Held for Trading categories are expected to suffer from high depreciation charges, in view of the northward momentum of yields.

This was despite banks' shrinking the average maturity of their investment portfolios across categories to about three years.

However, bankers said they would actually stand to benefit.

Mr N. Kanta Kumar, Chairman and Managing Director, Syndicate Bank, told Business Line, "All those banks with excess depreciation will actually benefit, when the securities are redeemed at par." This was because the redemption of securities moved into HTM category was expected around 2010.

Besides, bankers said, many of these securities were also used for repos. This allowed bankers to ensure that the HTM securities remain liquid. In fact, they said that it was the repurchase window of the RBI and the Collateralised Borrowing and Lending Obligation Market (CBLO) that was helping them sustain the high incremental credit-deposit ratios in excess of 120 per cent.

In fact, both these windows have offset the falling trading volumes in the markets by helping banks to meet their liquidity requirements and slow deposit growth.

Bankers said what also helped them was the Finance Minister's budgetary announcement converting all the outstanding recapitalisation bonds into SLR securities. These securities are mostly in the HTM category and were not eligible for repos.

The SLR status had now made Rs 22,000 crore of securities eligible for both repos and CBLO's improving bank liquidity levels.