Deposit rates not to rise soon

During the fourth quarter (January-March), banks step up the activity to meet annual targets.
This leads to a race to raise funds from markets often by jacking up deposit rates.
This time around, the market has not seen such trend yet.
Abhijit Lele reports.

The credit-to-deposit ratio is at an all-time high of 79% with bank loan growth touching 15%.

But that may not trigger any sharp rise in bulk deposit rates as banks have a large pool of government bonds that are much above the statutory liquidity ratio (SLR) of 19.5%.

They could sell part of the excess SLR to generate liquidity to finance rising credit demand.

Bulk deposit is amount raised in excess of Rs 1 crore from one party, mostly institutions, business establishments, and high net worth individuals.

Besides excess SLR resources, subdued fund raising by finance companies, the Reserve Bank of India's elevated liquidity management activity and subdued consumer inflation are expected to ease pressure on interest rates.

Generally during the fourth quarter (January-March), banks step up the activity to meet annual targets.

This leads to a race to raise funds from markets often by jacking up deposit rates.

This time around, the market has not seen such trend yet.

In fact the rates for the certificate of deposits, one form of bulk deposit, softened in December.

Banks raised Rs 31,000 crore through CDs till December 7, 2018, in an interest rate band of 6.99% to 9.37%.

They raised about Rs 32,200 crore till December 21, 2018 in a band of 6.83% to 9.02%, according to RBI data.

The finance and housing finance companies that compete with banks in the market to raise funds are not borrowing in large amounts.

Instead, they have sold loans to banks to get funds, said Karthik Srinivasan, head of the financial sector ratings at ICRA.

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Much of the uptick in credit growth of banks is a reflection of the loan portfolio that they picked from non-banking finance companies and HFCs in the third quarter.

This time around, the scale of market borrowings by NBFCs and HFCs are expected to be lower as they have cut down on their lending.

After the liquidity shock in September 2018, the focus is now on asset-liability management and ensuring that the company has resources to meet repayment obligations.

An advisor on fund raising said that for NBFCs, the single-minded focus on expanding loan book is a thing of the past. They have to balance growth aspirations with repayment obligations.

This is expected to reduce pressure on interest in the market.

The liquidity in the market almost froze in the aftermath of default by the Infrastructure Leasing & Financial Services (IL&FS) group entities in the second quarter.

With scarcity of funds in the markets, NBFCs and HFCs that were facing resource crunch sold part of their loan books to banks.

The RBI has also stepped up liquidity support till date in the current financial year to provide adequate resources to meet credit demand.

CARE Ratings said deposits grew 3.4% during the April-December 2018 period against 0.6% in April-December 2017.

During the last nine months, bank credit increased by 7.7% (growth was 2.9% last year).

This led to persistent liquidity problems all through the last three months.

In terms of incremental funds, deposits were Rs 3.92 trillion while credit was Rs 6.62 trillion.