Letter to BS: Recent regulations may reduce bank's demand for govt bonds

The recent regulations would reduce a bank’s demand for government bonds by around two per cent of aggregate deposits. While this would imply more flexibility to the financial institutions to meet the statutory requirements, the gap between the supply and demand can widen on account of the bearish sentiment. Unwillingness of the banks to hold government bonds in excess of their liquidity requirements, can also offset the capital losses, that ought to be marked-to-market now. 

Although the loss-spread over four quarters would improve the actuals and the projections, the last thing that the financial lenders with mounting NPAs need, is a below-par treasury book. The hawkish stance by the regulator can force a channelisation of the funds and render the much-needed push to alternative asset classes in the economy. Investment vehicles viz. certificates of deposit, commercial papers, money market bills/notes and high-quality/blue-chip stocks; promise to not only offer higher returns but also significantly mitigate the credit risks.

Girish Lalwani  Delhi
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