Indian state-run banks to pass up bonds to focus on lending -analysts

(Corrects dateline and fixes typo in second paragraph)

By Dharamraj Dhutia

MUMBAI (Reuters) - Indian state-run banks that sold government bonds in the last few sessions may not immediately turn buyers, as their focus shifts to cutting down investment under the Statutory Liquidity Ratio (SLR) to fund credit growth, analysts said.

State-run banks sold bonds worth more than 304 billion rupees ($3.69 billion), on a net basis, in the 25 trading sessions through Dec. 6, data from the Clearing Corp of India showed.

"Banks are facing a liquidity crunch, while SLR levels are more than adequate. In such a scenario, there will be moderate buying by state-run banks," said Sushanta Mohanty, general manager–treasury at Bank of Baroda (BoB).

SLR is the minimum percentage of deposits that commercial banks are required to invest in liquid assets, such as government bonds and state debt.

Banks are mandated to invest 18% of their total deposits in SLR securities, but, according to traders, they have invested around 26%-28% in such notes.

Senior dealers from state-run banks confirmed that part of the selling was to free up funds invested in SLR securities, while banks also looked to book profits and divert the funds towards lending as credit growth picks up.

Banks' credit grew by 17.17% on-year for the fortnight ended Nov. 18, data from RBI shows.

"Apart from profit-booking, state-run banks are liquidating to meet credit needs, as deposit rates are rising and cost of funds will become higher," said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank.

In November, state-run lender Punjab National Bank said it may cut excess SLR reserves to boost credit flows if required, while in September, Reserve Bank of India Governor Shaktikanta Das had said banks can get more cash by drawing down on excess cash reserve ratio and SLR.

"The fall in yields gave banks a much-needed opportunity to diversify money from bond investments to the actual business of lending. This has been done across the spectrum," a trader with a state-run bank said.

India's benchmark 7.26% 2032 bond yield eased to 7.18% last week, having fallen by more than 35 basis points in the last month on hopes of a slowdown in the pace of rate hikes.

However, traders say yields are unlikely to fall much from the current levels. The benchmark yield was last seen at 7.26%.

"I do not see a major movement in yields. Unless there are any (positive) surprises, yields should hover in the 7.20% to 7.40% range for some time," BoB's Mohanty said. (This story has been refiled to fix dateline and typo in paragraph 2)

(Reporting by Dharamraj Dhutia; Editing by Janane Venkatraman)