The Hindu Business Line : Banks raising Tier-II capital funds at over 10%

Changing track
Banks attempting to redeem bulk deposits with retail deposits

Chasing retail funds through structured deposits

Shift in view of credit offtake with beginning of peak season

C. Shivkumar

Bangalore, June 27 The liquidity overhang notwithstanding, banks are still raising Tier-II capital funds at coupons of over 10 per cent.

Bankers said that the high coupons were largely on account of high yield expectations of some of the bulk investors in bank bonds like the Life Insurance Corporation, private sector life insurers and provident funds.

Among the banks raising funds at high rates include the AAA rated State Bank of Patiala (SBP), a subsidiary of SBI. SBP is in the market for raising Rs 200-crore 15-year bonds at a coupon of 10.74 per cent with a call option at 10 years. The call option however gives a discount of only 50 basis points at 10.24 per cent. Besides, Nabard another AAA rated institution, was raising three-year funds at 9.75 per cent.

Liquidity overhang

Bankers said that the liquidity overhang had not translated into reduced cost of funds. Instead costs were still on the uptrend. The overhang was largely on account of short term flows, and funds for the recent large public offerings including ICICI Bank that had garnered an over subscription of 12 times. The bankers said that once the refunds begin on the float funds, the liquidity situation was likely to reverse. Moreover bankers said that some of the banks were attempting to redeem some of their high-cost bulk deposits, with retail deposits in a bid to protect their net interest margins. Till April end, some of the public and private sector banks in the country had raised bulk deposits at rates of close to 12 per cent. Many banks had capped the bulk deposit intake to 30 per cent. But, the bankers said, the focus was to reduce bulk deposits even further to just about 20 per cent and increase the retail funds including CASA (Current and Savings Accounts) to over 70 per cent of their deposit base. This was to limit the possibility of mismatch risks that bulk deposits posed.

Many banks were now chasing retail funds through structured deposits with tenures above one year and less than two years offering rates anywhere between 9.25 per cent and 10 per cent. Such funds, the bankers said would bring down the weighted average cost of working funds and help defend the net interest margins at 3 per cent.

The shift was also in view of the credit offtake with the beginning of the peak season.

It is at this time that corporate and farm offtake usually take off, the primary focus of public sector banks. This is likely to put pressure on liquidity, the bankers said.

Containing liability costs is also in view of the lending rates that banks have committed to the farm sector.

The committed lending rate for the farm sector is 7 per cent. Inclusive of a central subvention of 2 per cent the effective yield on farm credit assets is 9 per cent.