Investors in Indian government bonds have struck gold and public sector banks have got a gold mine being the largest buyers of government paper. Bond yields have fallen 61 basis points ever since the government announced its massive currency withdrawal move on 8 November. The benchmark 10-year yield was trading at 6.19% or 6 basis points below the overnight policy repo rate. Bond prices move inversely to yields. A basis point is one-hundredth of a percentage point.
Foreign investors, true to their nimble strategies, have already cashed in on the opportunity by selling off bonds and pocketing treasury gains. Data from the Clearing Corporation of India Ltd (CCIL) shows that foreign banks sold bonds worth Rs18,244 crore between 9 November and 23 November.
For public sector banks, booking profits may be a good way to salvage earnings at a time when provisioning towards bad loans is eating away profits and even resulting in huge losses for some lenders. Over the last three quarters, non-interest income that includes fee income, besides treasury profit, has been the main driver of profits for most banks as core income remained depressed. For the June quarter, the aggregate non-interest income of all listed public sector lenders rose 39% from a year ago while net interest income fell by 1.97%. For some lenders such as Punjab National Bank, non-interest income jumped 68%.
Although fee income forms the lion’s share of non-interest income of banks, treasury gains for most lenders is at least a quarter of their other income. Within non-interest income, fee income growth is slowing. With the latest measures of waiving off charges for withdrawals from ATMs (automated teller machines), banks are bound to feel the pinch on fee income too. The country’s largest lender, State Bank of India’s fee income grew 37% for the June quarter but treasury gains surged by 53% and contributed to more than 37% of the growth in non-interest income.
But public sector lenders have a unique problem. Faced with a massive surge in deposits due to the cash clean-up, lenders will have to park these inflows either with the Reserve Bank of India or into government bonds as loan disbursals are yet to pick up significantly. So even if they book profits on part of the existing portfolio, banks would likely end up being buyers of other bonds as well. The bond portfolio across banks looks set to undergo a thorough churning in search for profits.