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Public sector banks, the traditional heavyweights in bond trading, are ceding ground to foreign lenders as a scramble for deposits compels state-owned players to liquidate bond holdings while the international players aggressively court rising global interest in local debt.
From holding a share of almost 60% in the trading book portfolios of banks just prior to the Covid-19 pandemic, state-owned lenders now account for a little above 40%. Foreign banks, on the other hand, have seen that share climb from 19% to almost 30%, central bank data showed.
A large part of the trading book is made up of activity in government bonds as banks in India mandatorily buy large quantities of high-quality liquid assets like sovereign debt as a prudential measure.
“The tapering in PSU banks’ share in the trading portfolio can largely be attributed to the fact that state-owned banks have been bringing down their excess SLR (Statutory Liquidity Ratio) holdings at a time when the wedge between credit growth and deposit growth is high,” said Kanika Pasricha, state-owned lender Union Bank of India‘s chief economic advisor.
“In FY24, deposit growth for PSU banks was 10.4% while credit growth was relatively higher at 13.6% as balance sheets are now much stronger with improved asset quality,” she said.
Private Banks Outran
Over the past year, foreign banks’ share in trade has also eclipsed that of private sector banks, many of which have much larger bond portfolios than multinational banks.
According to an analysis of trading book portfolios by the Reserve Bank of India in its June 2024 Financial Stability Report, public sector banks’ share in total investment was at 42.8% in March 2024, while the figure for foreign banks was 29.1%. The market value of the investments assessed by the RBI was ₹22.4 lakh crore.
In December 2019, the share of PSU banks in total investment was at 57.7%, while that for foreign banks was at 19%. The RBI’s assessment is for banks’ Available for Sale (AFS) and Held for Trading (HFT) books, which make up the trading portfolios of banks.
The commencement of a monetary tightening cycle by the RBI in May 2022 was also a factor that prompted PSU banks to whittle down trading operations amidst volatility in bond yields, traders said.
A Foreign Accent
The increasing share of foreign banks has been led by two key factors – a burgeoning trade in a complex derivative product that overseas banks execute to meet insurance companies‘ growing demand for risk-free debt and the global flurry of interest in Indian bonds after JP Morgan included the country in its Emerging Market bond index.
“Foreign banks have seen increased demand from insurance companies for FRAs (forward rate agreements) which has led to increased activity in underlying bonds. Also, FPI interest has picked up since September 2023, which has led to increased activity by foreign banks,” said Vikas Jain, head of India fixed-income, currency and commodity trading at Bank of America.
Data that the Clearing Corporation of India has recently started publishing showed that from March 15 to June 26, the total notional amount of bond FRA transactions including buy and sell trades was at ₹35,065.70 crore.
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