Banks shift bets from G-secs to state and corporate bonds
Banks are preferring instruments with higher premium over government securities for their held-tillmaturity (HTM) portfolio, following the new investment norms, which came into effect from April 1.
They are stocking up on corporate bonds and state government securities to boost yield on their portfolio, according to market participants.
“Definitely, if there is a good spread available and without lower credit risk, those instruments will be favoured to boost the yield on the portfolio. There will be high demand for good-rated papers, on account of keeping them in HTM as under the new norm, nonstatutory liquidity ratio (SLR) portfolio can be kept in HTM,” said VRC Reddy, head of treasury at Karur Vysya Bank.
The yield spread between Aaa-rated corporate bonds and the benchmark 10year government bond narrowed by 5 basis points (bps) so far in April. On Tuesday, the yield spread stood at 41 bps.
Under the revised investment norms, commercial banks are now allowed to keep non-slr bonds in their investment portfolio. However, investment in non-slr securities with an original maturity of less than one year is prohibited.
This restriction does not apply to investments in commercial papers, certificates of deposits, and non-convertible debentures (NCDS) with an original or initial maturity of up to one year issued by corporates (including non-banking financial companies or NBFCS), according to Reserve Bank of India (RBI) guidelines.
Banks must categorise bonds as “heldto-maturity” on a permanent basis, with the exception of 5 per cent of the portfolio that can be withdrawn throughout the year, according to the new norms. Any deviation from this requires approval from both the bank’s board and the RBI.
Earlier, banks were allowed to reclassify their investments among categories once a year on the first day of the financial year, through which they used to book capital gains. The higher premium on state government securities as compared to central government securities also remained a draw for banks.
“Corporate bond demand is there, but there is no mandatory investment for corporate bonds. The spread of state bonds is attractive. Hence, the preference is there for HTM books,” said a dealer at a stateowned bank.