The Hindu Business Line : Banks see further tightening of liquidity; hike deposit rates

Bangalore, Oct. 9 Banks have begun pushing up deposit rates anticipating a further tightening of liquidity, despite the Reserve Bank’s 50 basis points cut in the Cash Reserve Ratio (CRR)

The latest bank to hike deposit rates is the public sector Canara Bank. It hiked deposit rates close to 10.5 per cent for maturities above 500 days. Deposit rate hikes come even as the CRR cut was expected to release at least Rs 20,000 crore into the banking system from October 11.

Bankers said that the rate hikes were in view of the tightening of liquidity, with the beginning of the peak season.

The intense competition for liquidity saw banks floating certificates for deposits (CD) for bulk funds for tenures ranging between three months and one year at rates as high as 12 per cent. Bankers said since the bulk of the CD resources were raised for short-term tenures, they would need to refinance the same with the longer tenure retail deposits.

Bankers said with interest in equity markets completely evaporating more funds were flowing into bank time deposits. They said most of depositors preferred to have the funds for long durations as a safe haven. Banks’ offer of high returns was to attract term funds for maturities up to 2 years. While the rates were high, retail deposits were still at least 150-200 basis points below CD rates.

High credit off-take

The focus on long-term funds was in view of high credit off-take from the infrastructure and farm sectors. Credit off-take on a year-on-year basis grew by 26 per cent. Preference for domestic credit from infrastructure sectors has been mounting, largely driven by the limited availability of External Commercial Borrowings (ECBs) to Indian borrowers. The reduced availability of ECB funds were in view of the low risk appetite of international lenders as the global credit crisis intensified.

High pricing of ECBs

As a result, although the RBI had revised the ceiling to 450 basis points over the London Interbank Offered Rate (LIBOR) for borrowings over 7 years, there were few lenders. Most global lenders insisted on very short call options for such infrastructure loans. Besides, pricing of ECBs were also very high, almost close to 600 basis points over LIBOR. At this rate, the borrowing costs, excluding hedging costs, are 11 per cent.

Borrowers were also wary of spikes in the LIBOR given the current global liquidity situation. In addition, borrowers also feared the impact of exchange rate depreciation, as the rupee has fallen by about 22 per cent against the dollar since the beginning of this financial year.

The rising credit demand, bankers said, was also beginning to impact domestic lending rates. In fact, most banks were also resorting to prioritising credit disbursements. Credit to some of the retail lending has already been choked off.

Retail advances are barely 15 per cent of banks’ gross advances. The rising cost of corporate credit from the banking sector was evident from the rising spreads between sovereign corporate yields.

Five-year AAA rated corporate paper is currently about 300 basis points over comparable maturity sovereign paper. Six months ago the spreads were under 200 basis points.