Banks’investments in commercial papers (CPs) and bonds issued by the private corporate sector crossed the Rs 2.5 lakh crore mark during the fortnight ended September 16, data released by the Reserve Bank of India (RBI) show.
Banks’ investments in commercial papers (CPs) and bonds issued by the private corporate sector crossed the Rs 2.5 lakh crore mark during the fortnight ended September 16, data released by the Reserve Bank of India (RBI) show.
With their investments in both CPs and private sector corporate debt at record highs, banks have parked over 2.5% of what they have garnered from deposits, an FE analysis of the data reveals. Two years ago, the same was less than 1.8%.
This rise in investments is probably a function of rising investments by public sector banks (PSBs) facing muted credit demand from companies and stressed loan books. The growth in outstanding credit to the industry in July, for instance, was 0.55% (Y-o-Y), compared with 19.7% (Y-o-Y) in July 2011.
Analysts believe that given high credit costs of PSBs, they are choosing to concentrate on high quality investments, instead of advances, until they get a grip on their ballooning non-performing assets (NPAs). Credit costs are provisions set aside by banks for bad loans as a percentage of their total loan book.
Banks’ increasing investment in CPs and corporate bonds is also a function of borrowers moving to the debt market to benefit from lower interest rates. The yield on FIMMDA benchmark for ‘AAA’-rated bonds is currently at 7.65%, while the lowest one year marginal cost of funds-based lending rate (MCLR) is at 9.1%. Similarly, while the rate of interest on three-month CPs for ‘AAA’-rated companies is 6.8%, the lowest three-month MCLR is 9%.
Along with falling money market rates and a relative stagnancy in bank lending rates, another factor which has contributed to the rise in inflows into the debt market is decline in investment in bank instruments like certificates of deposit.
Banks have been asked to lower their dependence on wholesale funds and this has resulted in slowing down of fresh CD issuance.