Banks pile up G-secs as growth in loans lags surge in deposits

„Banks’ G-secs holdings rose Rs.235.3bn from March through June

„Banking sector deposits grew whopping Rs.467 bn during same period „Has helped govt. to raise funds at cheaper rate triggering borrowing spree

„Banks’ holdings of G-secs and growth in loans are typically negatively correlated

Banks have significantly increased their holdings in government securities (G-secs) in recent times as loans haven’t kept pace with the surge in deposits, leaving massive amounts of excess liquidity, which otherwise would have gone into the hands of private borrowers.

According to Central Bank data, G-secs holdings of commercial banks rose Rs.235.3 billion from the beginning of March through June when the government accelerated borrowings to battle pandemicinduced economic challenges.

During the same period, commercial banks’ deposits grew by a massive

Rs.467 billion as both individuals and firms left moneys in their bank accounts, which happened at a record pace during lockdowns as workers were sheltering-in-place while companies preserved cash to ride the pandemic unscathed.

However, the total holdings of G-secs by the banking sector, which includes licensed specialised banks— frontrunner being National Savings Bank (NSB)— could be much higher as NSB is mandated to invest a minimum of 60 percent of its deposits in government securities.

By end-june NSB had a total savings and time deposit portfolio of Rs.1.1 trillion.

During the first six months of 2020, the government’s total outstanding debt stock rose by Rs.1.02 trillion, of which Treasury bills and bonds rose by Rs.675.4 billion.

March through June was the fastest stretch of four months, which the banks added most G-secs into their holdings in recent times.

In the preceding four months stretch from November 2019 to February 2020, such holdings rose by only Rs.92.1 billion and in the earlier four months from July through October 2019 had in fact recorded a de-growth by Rs.1.4 billion, the Central Bank data showed.

The only four-month stretch during the last twelve months, which exceeded the most recent accumulation of government securities by commercial banks, was seen during the corresponding four months from March through June 2019 when the banks added Rs.268.7 billion in government securities into their holdings.

However, the growth in deposits was only one third of what the banks mobilised during the same period in the incumbent year and the total outstanding loans and advances contracted by Rs.6.7 billion.

The slowdown of the economic activities due to protracted policy and political uncertainty which was exacerbated by the Easter Sunday attacks triggered private borrowers to hibernate while forcing the government to raise funds to fund the government as State revenues faltered. Banks’ holdings of G-secs and growth in loans are typically negatively correlated.

The government securities provide a safe place for banks to park their liquidity, though at low rates, which otherwise would have earned from lending to private borrowers, as interest rates have come down drastically in response to the monetary stimulus provided to support the economy to recover from the shock bought in by the pandemic.

By end-june, commercial banks had an excess liquidity which comprised of excess reserve and cash worth Rs.138.5 billion, up from Rs.113.2 billion by the end-december 2019.

On the other hand, this massive increase in banks’ holdings of G-secs has also supported the government to raise funds at a cheaper rate helping to fund its borrowing spree.

How long the banks would continue to accumulate G-secs remains a question as the rebound in economic activity after the coronavirus lockdowns is expected to create more demand for credit by private borrowers.

When such an instance occur, banks seeking higher yields over and above their funding cost would loan their funds to private borrowers, leaving little money to the government.

Otherwise continued funding of government by the banks would leave out the private sector, leading to a condition referred to as the ‘crowding out’.