Indian lenders to chase corporate bonds as new investment rules kick in, treasury officials say

Power Finance

21/03/2024 07:55

By Dharamraj Dhutia
       MUMBAI, March 21 (Reuters) - Indian banks will gravitate
towards corporate bonds they intend to hold until maturity once
new central bank rules kick in next month, as yields are
currently elevated and the investments would be spared from
market-linked markdowns, treasury officials said.
    From April 1, corporate bond investments will be allowed
under held-to-maturity (HTM) category for the first time,
provided the fair value is disclosed and investments protected
from mark-to-market volatility, according to revised Reserve
Bank of India rules.
    Currently banks can hold up to 23% of their deposits under
HTM as investments in government bonds and state debt, which
will be reduced in phases from April.
    However, the current yield spread of more than 50 basis
points in favour of corporate bonds makes them an attractive
investment.
    "From April, for the HTM portfolios, the AAA-rated bonds
especially of state-run companies are an attractive bet as they
are yielding higher than the state bonds and do not carry much
credit risk," VRC Reddy, treasury head at Karur Vysya Bank,
said.
    The three-year to five-year government bond yields were in
the range of 7.06%-7.08%, while state bonds of similar duration
yield around 7.38%-7.42%.
    In contrast, LSEG's AAA-rated benchmark three-five year
corporate bonds were yielding 7.62%-7.70%.
    Major beneficiaries would be highly rated and reputed names
as banks would avoid even the slightest of credit risk for the
HTM segment, the treasury officials added.
    The officials have said that bonds of AAA-rated state-run
companies such as Power Finance Corp  PWFC.NS  , REC  RECM.NS  
and Power Grid Corp  PGRD.NS  could be the preferred choice.
    Alok Singh, group head of treasury at CSB Bank, expects the
spread between government and corporate bond yields to ease
below 50 basis points, also aided by improvement in liquidity
condition.
    "Some banks have already started increasing exposure to
corporate bonds, and this is expected to rise further as they
intend to capture the higher yields," Venkatakrishnan
Srinivasan, founder and managing partner at Rockfort Fincap,
said.
    Corporate bonds of some sectors such as infrastructure
companies could benefit further as banks try to meet their
priority-sector lending targets by raising exposure to debt, a
treasury head of a state-run bank said, requesting anonymity as
he is not authorised to speak to the media.

 (Reporting by Dharamraj Dhutia; Editing by Swati Bhat and
Shounak Dasgupta)
 ((Dharamraj.Dhutia@thomsonreuters.com))