The Hindu Business Line : Low credit offtake forces banks to focus on investments

Bangalore, Dec. 5 Well into the busy season, corporate India is yet to start drawing loans from banks in a big way. Faced with a slack pick-up, banks have decided to deploy their money in investments — principally, government securities.

They are, however, taking care to put the money in short-term securities — just in case they have to liquidate it to meet higher demand for loans in the weeks ahead.

Credit offtake, from the beginning of this financial year till November 9 was Rs 1.35 lakh crore. During the corresponding period last fiscal it was Rs 1.65 lakh crore. This translated into an incremental credit deposit ratio of 44 per cent and 84 per cent respectively.

Though most banks reduced deposit rates, deposits were still growing. Bankers said that redemption of corporate bulk deposits also had little impact on the deposit growth this year. In fact, more corporates were parking surplus funds with the banks.

Despite the cap

This was despite the unofficial cap on rates paid on bulk deposits at 9 per cent by all the public sector banks. This cap was imposed early this financial year, to defend the net interest margins of the banks. Yet, despite this cap, deposit growth has accelerated to 27 per cent on a year-on-year basis, according to the Reserve Bank of India’s weekly statistical supplement.

Banks are left with few options other than deploying resources in government securities, including Treasury Bills. As a result, investments in G-Secs alone was Rs 1.54 lakh crore this fiscal so far as against Rs 43,000 crore during the corresponding period of the last fiscal. G-Sec investments were at least Rs 20,000 crore more than bank credit this fiscal. Last fiscal, the situation was the reverse, when credit exceeded investments by about Rs 1.2 lakh crore.

Deposit ratios

The preference for investments has pushed investment deposit ratio to 51 per cent this fiscal so far as against only 22 per cent in the last fiscal. Then most banks had preferred to keep their incremental investment deposit ratios low in view of their surplus holdings of government securities.

Despite the shift to investments, most PSBs still prefer short-dated securities, with a residual tenure of under three years. The reason, bankers said, was that they were hopeful that credit offtake would still pick up in the coming weeks. Consequently they preferred remaining liquid.

Moreover, bankers said that they were still looking for positive spreads over their weighted average cost of working funds. This was currently close to about 7 per cent, after factoring in the cash reserve ratio (cash to be held as reserves against deposits) of 7.5 per cent. These costs were factored at the weekly bids for T-bills, currently the favourite instrument among banks. At Wednesday’s auctions, the cut-off yields remained at 7.52 per cent for the third week in succession.

Bankers said profits would get knocked adversely in this quarter, in view of the tightening stance of the RBI.

Last week at BANCON 2007 in Mumbai, the RBI Governor, Dr Y.V. Reddy, had said: “Credit growth is where we want it to be.”

Net interest margins as a result are expected to narrow further in the third quarter results, bankers said.

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