Surplus liquidity, pushes risk averse banks towards government bonds; investment soars 19% this year

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Updated: Jul 21, 2020 8:48 AM

Scheduled commercial banks’ investment in central and state government securities have increased by over 19% as on July 3 compared to last year, led by weak credit growth and surplus liquidity.

Experts believe that with systemic liquidity being high and no pick up in credit, such investments will continue in the near future.Experts believe that with systemic liquidity being high and no pick up in credit, such investments will continue in the near future.

Scheduled commercial banks’ investment in central and state government securities have increased by over 19% as on July 3 compared to last year, led by weak credit growth and surplus liquidity. According to the latest data put out by the Reserve Bank of India (RBI), banks’ investment in these papers amounts to Rs 42.17 lakh crore compared to Rs 35.42 lakh crore a year ago. Experts believe that with systemic liquidity being high and no pick up in credit, such investments will continue in the near future.

MS Gopikrishnan, independent market expert believes credit growth is unlikely to see any substantial pick up in coming times. ‘It’s definitely not going to happen in a hurry. Private investments are also not picking up and we are seeing capacity utilisation fall. One also has to see that the government is borrowing more this year. So, at a time when credit growth is low and liquidity is high, banks will continue to park their money in safe instruments and their investments in such papers are going to remain reasonably high this year as compared to last year,’ Gopikrishnan said.

Indeed, the government has been borrowing more every week compared to the notified amount. For example, last week, the central government borrowed Rs 34,000 crore instead of the notified amount of Rs 30,000 crore. Similarly, state governments have also been borrowing more than the notified amount. On July 14, ten state governments borrowed a total of Rs 13,750 crore against the notified amount of Rs 11,250 crore.

With so much of high grade paper available in the system and risk aversion still persisting, lenders are choosing to increase their investments in government securities. According to a Care ratings report, banks are being selective with their credit portfolios in recent times and as a result, credit growth is likely to be slower in near term.

“The overall credit growth in the banking sector has remained flat for the fortnight ending July 3. The credit growth continues to remain at nearly half the level during the last two fortnights at 6.2% and 6.1%, compared to last year’s level of 12% owing to risk aversion in the banking system and weak demand. As most of the metropolitan region is still under lockdown and slowdown in the economic activities, the credit pickup is weak. Banks are cherry picking their credit portfolios with caution, hence credit growth of banks is expected to remain slower in the near term,’ the report stated.

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