The finance ministry wants public sector banks in which the government holds the majority stake to make changes in their exposure to various sectors and reshuffle their asset portfolios by switching from short-term to long-term assets.
Ahead of the ministry directive to PSU banks on keeping interest rate hikes in abeyance and seeking board approval, a detailed note sent by the ministry to all PSU bank CEOs directed them to "revisit sector-wise lending targets" and "make suitable modifications in lending priorities".
The ministry note also directed banks' attention to the "slope of the yield curve and the tenure buckets of bank loans".
According to the ministry, with a widening of the gap between the yield on long- term and short-term government securities, the yield curve has stiffened in the first quarter of 2006-07.
"Such a stiffening opens up the probability of maximising profits by switching from shorter end to the longer end of the maturity spectrum," the note said.
The government hoped that the bank CEOs would have a close look at the "continuing tilt of the portfolios (of their banks) in favour of short-term instruments such as liquidity adjustment facility" (LAF) -- the Reserve Bank of India's reverse repo window where banks perk short term liquidity and earn 6 per cent interest -- and ensure that the tenure composition of the portfolio is "in conformity with the best interests of the bank as well as the economy".
The government's view is that banks, especially those in the public sector, "have a crucial stake in maintaining the growth momentum". This is because banks' profits "depend on financing of productive investment activities which, in turn, not only depend on but also determine the growth of the economy".
The ministry note said that banks holding of SLR securities was more than the RBI stipulated 25 per cent and hence they had "sufficient headroom" to lend.
In other words, they can liquidate excess SLR holdings and use the money for lending. "If more funds are available to the productive sectors, there may not be a need to reprice loans to the productive sectors," the note said.
Senior bankers admitted that there was indeed no pressure on liquidity at this point but they did not see merit in the government's argument that they should not perk excess money at the RBI's reverse repo window and instead build long-term assets.
"If we do this, who will subscribe to the government's borrowing programme?" one banker asked.
They, however, agreed that credit portfolios could be churned. Last year, banks' personal loan assets grew by 44.4 per cent, housing loans 44.8 per cent, loans against shares 23.6 per cent and against credit card outstandings 59.3 per cent. Banks may go slow on these sectors in 2006-07.
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