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Loans return to spotlight

New Delhi, Oct. 23: Banks are reworking their investment portfolios to increase loan-based income as falling profits in the trading of government securities has lowered treasury earnings over the last few quarters.

The overall investments of commercial banks in government securities (G-secs) have remained more or less stable since the past one year. In August 2004, the total amount invested by banks in G-Secs was Rs 7,03,466 crore compared with Rs 7,38,604 crore in the same month this year, registering an increase of Rs 35,138 crore.

Central government securities are rupee-denominated obligations issued by the Reserve Bank of India, on behalf of the government, for deficit financing. The sovereign bond market constitutes about 70 per cent of the country’s debt market.

Bankers attribute the flattening of the G-sec portfolio curve to lower profits from these instruments, limited trading opportunities and higher corporate credit-offtake in recent times.

“In March 1996, a ten-year government bond carried a coupon rate of 14 per cent. This has significantly come down to about 5 per cent in October 2004,” a Delhi-based public sector bank executive told The Telegraph.

Banks earn from investments in G-secs (often referred to as treasury income) through interests and secondary trading.

Bankers said in the 1999-2004 period, G-secs found favour with banks to park surplus funds and book healthy income. “There was a time between 1999 and 2004 when banks were awash with funds but companies were not taking any. In such circumstances, banks found it profitable to invest heavily in G-secs as they were giving robust returns,” a banker said.

Banks were also using the income from trading in G-secs to meet their provisioning requirements and wipe off NPA accounts, he said.

With the non-food credit offtake showing a robust growth in recent times, banks are now aggressively pushing advances across the entire loan spectrum ' retail as well as institutional.

Non-food credit of commercial banks increased by Rs 3,00,000 crore to Rs 11,60,621 crore in August from Rs 8,63,714 crore a year ago.

Bankers feel that the fall in treasury income will be compensated by the income from loans and advances, even though the interest rates are soft at present. The SBI’s indication of a full-year loan growth of close to 35-40 per cent is indicative of this trend.

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