Commercial banks trimmed their exposure to government securities by as much as 90 basis points in the first quarter of this fiscal, against an increase of 130 bps in the March quarter, while insurance companies raised their holding by 70 bps, showed the quarterly public debt management report released by the finance ministry on Friday.
Massive mark-to-market losses due to elevated yields have discouraged banks, including the public-sector ones that have been struggling with low capital base due to huge bad debts, to cut down on their exposure to government papers. G-Sec yields further hardened in the first quarter of the fiscal, and the weighted average yield of primary issuances rose to 7.76% from 7.34% in the previous quarter, reflecting the impact of both global and domestic developments, the report said.
Commercial lenders lowered their share of outstanding dated government securities to 41.8% as of June from 42.7% in March, according to the report. Still, banks’ share in the June quarter was higher than 39.7% a year earlier. Foreign portfolio investors (FPIs), too, cut their holding by 60 bps to 3.8% in the June quarter. However, insurers raised their share to 24.2% in the first quarter of this fiscal from 23.5% three months before.
The Reserve Bank of India in April allowed banks to spread out the provisioning to cover losses for two quarters through March 2018 on their government bond portfolio across four quarters, offering a relief to lenders who would have otherwise seen a substantial capital erosion.
Total liabilities of the government rose to Rs 79.8 lakh crore at the end of June, against Rs 77.98 lakh crore as of March 2018, the report said. Public debt made up for 89.3% of total outstanding liabilities as of June, with internal debt accounting for 83% of it. As much as 24.9% of outstanding dated securities had a residual maturity of less than 5 years.
“The manifestation of global developments being increase in crude oil prices, rate hike by the US Federal Reserve, rising geopolitical tensions while domestic developments included weak rupee, rise in CPI, demand-supply imbalance for shorter-tenor securities and weak demand from FPIs,” said the report.
During April-June period of the fiscal, the government issued dated securities worth Rs 1.44 lakh crore in 12 tranches as against Rs 1.68 lakh crore in the year ago period.
The temporary cash flow mismatches were bridged through issuances of cash management bills in three tranches up to Rs 65,000 crore during the quarter.