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C. Shivkumar

Deposits turning expensive; credit growing at 31 pc

Bangalore , Aug 7

With interest rates on the ascent, banks have begun revisiting take-out financing mechanisms with long-term financial institutions.

Bankers said that they are discussing take-out funding arrangements with financial institutions (FIs) such as IDFC, Power Finance Corporation, and Hudco.

All these FIs are specialised infrastructure financiers. Take-out financing involves securitising infrastructure advances in favour of long-term financiers.

This mechanism allows bankers to sell the assets to the FIs at a mutually agreeable pricing. This method is an off-balance sheet funding.

Till recently, most had competed with FIs in chasing assets, including infrastructure loans, for building up their respective toplines. This was at time when almost all of them were flush with liquidity.

The changed interest/liquidity regime is now forcing them to examine alternative avenues of raising funds for meeting their growing credit offtake requirements.

Credit is growing at 31 per cent, but deposits are growing at under 20 per cent on a year-on-year basis. Besides, most of the deposit growth is also almost entirely at the short end, which implies that the growth is mostly at savings accounts and term deposits up to a maximum of 90 days.

Bankers said that capital pressures also drove preference for off-balance sheet funding.

Currently, most banks have a capital-to-risk weighted asset ratio (CRAR) 10-12 per cent. Raising equity funds in the current market conditions is becoming difficult. Some banks have already reached the Government holding threshold of 51 per cent.

According to the bankers, to sustain the current pace of credit disbursement some have raised additional capital in the form of Tier II bonds.

Upper tier II bonds or perpetual bonds are also options for raising capital and sustaining credit growth. But pricing is a deterrent factor, they said.

For the last few tier II issues, the public sector banks were forced to cough up coupons of up to 9.5 per cent. For perpetual bonds, the rates would have to be above 10 per cent. After including CRR, SLR and placement expenses, the costs would be closer to 10.5-10.75 per cent, they added.

Moreover, deposits are also turning expensive. Already, many banks are paying up to 8.5 per cent interest on certificates of deposits and bulk deposits.

This is beginning to impose cost pressures and has a potential impact on net interest margin.

The bankers said that some of them had approached the FIs for take-out funding, which they said would release some capital resources that would be free of reserve liabilities for meeting incremental credit requirements. These resources would have minimal impact on the CRAR.

But the pricing of take-outs remains a contentious issue with the FIs, they added, because the FIs are looking for high discounting rates so as to generate yields of at least nine per cent during the residual life of the asset.

Yet, some bankers said that at this pricing the take-outs would be attractive, since the funds could be deployed to earn spreads of at least 3-4 per cent.

More Stories on : Credit Market | Financial Institutions

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