Cautious banks, MFs turn to govt securities

 

Source:BL:C. Shivkumar,Bangalore, May 12,2010

State development loan rates drop as risk aversion spreads.

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Narrowing spreads
Spreads between 10-year sovereign paper and the State development loans have dropped to about 40 basis points
SDL yields at Tuesday's auction as a result of the risk aversion dropped to about 8.19 per cent.

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The State Government securities have become attractive to banks and mutual funds as financial markets turned cautious on the unfolding crisis in Europe. Spreads between 10-year sovereign paper and the State development loans (SDL) have dropped to about 40 basis points compared to twice that during the last fiscal on the back of large institutional purchases. SDLs are market borrowings by the State governments and are sovereign-guaranteed.

SDL yields at Tuesday's auction as a result of the risk aversion dropped to about 8.19 per cent. The weighted average yield on 10-year sovereign papers is currently 7.78 per cent. Narrow spreads also imply reduced borrowing costs for the State governments.

The IDBI Gilts's Head of Treasury, Mr S. Srinivasa Raghavan, said, “Corporate bond issuances have also reduced. In this situation, SDLs have become attractive.” The credit risk aversion showed up in widening spreads between the Government securities and high-rated private sector corporate debt papers. The spread for typical sovereign and corporate debt paper is currently close to about 100 basis points. In March end, the spreads had dropped to as low as 49 basis points.

credit offtake

The liquidity overhang in the banking system also partly contributed to the narrowing spreads. The liquidity overhang was evident from the recourse to the reverse repurchase window. At Tuesday's liquidity adjustment facility auctions, recourse to the reverse repurchase window amounted Rs 32,470 crore.
In addition, the surfeit of liquidity in the financial markets was also contributed by the low credit offtake. The first half of the financial year typically tends to be period of low credit offtake.

The European crisis has also prompted some corporates to hold back capital expenditure. According to the Reserve Bank of India's data credit offtake, this fiscal year so far was in the negative by Rs 25,657 crore. The negative credit offtake in turn shows up in high investment deposit ratios.

On the other hand, incremental ID ratios this fiscal year so far is up by over 250 per cent (Investments this fiscal so far are Rs 54,679 crore as against aggregate deposits of Rs 20,173 crore).
Deposits

Banks are beginning to increase taking bulk deposits - in particular through certificates of deposits (CDs). CD rates for 12 months are down to 6 per cent or 50 basis points lower than one year retail term deposit rates.
Three-month CD yields were even lower at barely 4.25 per cent. Typically corporate capital expenditure is initially funded through internal resources before bank credit draw down. But low CD yields are a pointer that a pick up in credit offtake was also unlikely in the immediate future, bankers said.

In addition to the Government securities, some aggressive banks are also beginning to parking resources again in mutual funds. For the latest reporting fortnight, such investments amounted to Rs 1.07 lakh crore or a Rs 50,000-crore increase over the end of the last fiscal year (March 26, 2010).

This is being done to keep the yield on investments slightly above the cost of short-term liabilities in a low credit offtake regime.