Banks look to govt papers to reduce lending risk

Banks look to govt papers to reduce lending risk

Owing to the risk associated with lending to the private sector currently, banks have turned to lending government since it is less risky.

In August, government was involved in two Treasury Bill auctions and one Bond auction in which close to a trillion shillings was raised.

Treasury bills, according to online sources mature in a year or less while Treasury notes have maturities ranging from two to 10 years. Bonds have maturities of greater than 10 years.

“In the primary market, Shs974b (at cost) was raised, of which Shs376.7b was from T-Bills and Shs220b was from T-bonds,” a Ministry of Finance August Performance report, revealed, highlighting securities worth Shs596.7b were issued for the refinancing of maturing debt whilst Shs377.3b went towards financing other activities in the budget.
Uganda’s 2020/21 budget was placed at Shs45.4 trillion with a financing support of 16.4 per cent from domestic borrowing.

The interest in lending to government was also accelerated by increasing risk associated with private sector.
Credit extension to private sector dropped by 7.7 per cent in July compared to June which is partly explained by risk aversion tendencies of commercial banks that prefer to lend to government which is less risky.

However, the increased interest in government securities by commercial banks led to the decrease in yields.
“Yields decreased across all tenors. The decline in yields is partly explained by increased demand for this instrument given increased liquidity in the money markets,” the report reads in part.

The increase in demand for government securities, the report revealed was reflected in the bid to cover ratio which increased to two in August from 1.44 in July.
During the month, the report says all auctions were oversubscribed.

According to the report, government issued two T-Bond instruments, for a three-year and five- year tenors.
The Yield to Maturity, defined as total return anticipated on a bond if it is held until it matures, increased to 13.80 per cent on the three-year tenor in August compared to 13.50 per cent for a similar instrument in June 2020.
The rate for the 5 year tenor however decreased to 15.3 per cent in August from 16.3 per cent in April.

Government has always been criticized for domestic borrowing because experts say they suffocate the private sector out of borrowing.
According to the report, banks are turning to government securities to avert risk from private sector borrowing.

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