Banks’ share investments jump unprecedented 26% in fortnight: RBI data

Banks increased their investments in shares by an unusual 25.6 percent in the fortnight ended August 13, which experts attributed to likely aggressive participation in initial public offerings and the conversion of debt into equity, among other factors.

The total investment in shares by scheduled commercial banks rose to Rs 1.08 lakh crore on August 13 from Rs 86,233.8 crore in the fortnight ended July 30, according to data from the Reserve Bank of India.

Such an increase is unprecedented. Typically, the level of bank investments in shares is unchanged because such securities are perceived to be highly volatile.

Investments by banks were little changed at Rs 85,967 crore on July 16, the RBI data showed. In the year-ago period, the figure stood at Rs 89,427 crore.

What caused the jump?

While there is no data source to ascertain the reasons for the surge in bank investments in shares, experts who spoke to Moneycontrol cited probable reasons including the spike in the valuation of top-rated companies, participation in initial share sales, and conversion of debt into equity. Banks typically convert debt into equity as part of the debt resolution process.

During the fortnight ended August 13, the Nifty 50 on the National Stock Exchange rose 4.86 per cent.

“This is certainly a jump. There could be many reasons,” said the treasury head at a foreign bank who didn’t want to be identified. “Banks could have lent to people against shares to invest in these IPOs or invested in IPOs themselves. Also, they could have funded people or NBFCs funding the IPOs in the first place or lastly invested in short-term papers issued by NBFCs to exclusively fund their financing of IPOs.”

“Banks are allowed to trade in equities and traders would be taking advantage of the rally,” said a senior treasury official at a public sector bank. “Looks like there is more steam left.”

A senior analyst at a brokerage concurred.

“Banks have participated more aggressively in equity deals of late. This, along with a rise in share prices, would have caused this jump,” said the analyst.

Banks’ investments in bonds         

While there was a spike in banks’ investments in shares, their investments in bonds and debentures remained almost at the same level in the fortnight ended August 13. The outstanding investments in bonds/debentures stood at Rs 5,78,186 crore compared with  Rs 5,78,498.2 crore in the previous fortnight.

Banks’ investments in commercial paper stood at Rs 84,094 crore, up 4.46 percent from Rs 80,502 crore in the preceding fortnight.

“One must see banks’ investments in equities as a percentage of the total investments/assets. My sense is this won’t be huge despite the recent spike. Banks have a special leaning towards bonds than risky assets,” said Siddharth Purohit, an analyst at SMC Global Securities.

There are strict RBI rules for banks on capital market-related investments.

According to a 2015 master circular issued by the central bank, no banking company can hold shares in any company, “whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30 percent of the paid-up share capital of that company or 30 percent of its own paid-up share capital and reserves, whichever is less.”

Also, banks or financial institutions should not acquire any fresh stake in a bank if such an acquisition takes their holding in the investee bank above 5 percent, the RBI rules say.