Amid the tight liquidity environment and stretched loan-to-deposit ratios (LDRs), banks are looking at alternative fund-raising options to support their balance sheets, leading to several of them tapping the capital markets to raise debt or equity through varied instruments.

The surge in credit growth pushed Indian banks’ loan to deposit ratio (LRD) to a two-decade high of 80 per cent in December 2023, due to which incremental growth will “either come more slowly or be more expensive”. At present, credit growth is 1.5x nominal GDP, while deposits are rising in line with nominal GDP, said S&P Global in a note.

“Private banks are most exposed to this risk, as their LDR could cross 97 per cent in our alternate scenario. Banks will have to supplement deposits with onshore and offshore wholesale borrowings, potentially at a higher cost. The hit to NIMs could double, falling 20 bps to 2.8 per cent, and could translate into a 10-15 bps impact on return on average assets,” it said.

Since the beginning of the calendar year, State Bank of India has raised $1 billion overseas for ESG financing, followed by ₹5,000 crore through additional tier-I (AT-1) bonds. Bank of Baroda first raised ₹5,000 crore through long-term infrastructure bonds, and then ₹2,500 crore via tier-II bonds. Canara Bank, too, raised ₹2,000 crore via AT-1 bonds.

HDFC Bank raised $750 million in two tranches of its sustainable finance bond issue, whereas South Indian is in the process of raising ₹1,151 crore through a rights issue in March 2024. February 2024 also saw two IPOs by Jana Small Finance Bank and Capital Small Finance Bank, although these were also driven by regulatory timelines.

Even as credit growth is seen moderating to 14 per cent in FY25 from 16 per cent in FY24, it will continue to outpace deposit growth, leading to fall in NIMs to 2.9 per cent in FY25 from 3 per cent in FY24, and ensuring that deposit accretion remains competitive well into FY25. Private sector banks are seen the most impacted, given their higher LDRs of around 93 per cent and higher credit growth of around 18 per cent.

The current scenario of muted retail or CASA deposit growth has also prompted banks to hike fixed deposit (FD) rates to attract customers that are shifting to higher-yielding investments such as mutual funds, equity and real estate, leading to further deterioration in banks’ LDR levels.

Hike in FD rates

Over the past two months, several lenders have increased FD rates, largely for shorter tenure deposits of upto two years. Large private lenders such as Axis Bank, HDFC Bank and ICICI Bank are offering up to 6 per cent returns on one-year FDs, 6.7-7.1 per cent on 1.5-2 year deposits, and up to 7.2 per cent on two-year FDs. Axis Bank and HDFC Bank have also hiked rates on some bulk term deposits of over ₹2 crore.

Smaller private players such as Federal Bank and IndusInd Bank are offering upto 6.5 per cent for 1 year FDs, and 7.50-7.75 per cent of 1.5-2 years deposits. IDBI Bank and Punjab National Bank, too, are offering 6.75 per cent on 1-year FDs.

Post banks’ Q3 earnings, BNP Paribas Securities had said that the incremental pressure point on margins (till rates remain high) is repricing of term deposits (TD) and higher TD proportion in NDTL. As such, the first factor is expected to get phased out by Q1 FY25 as TD rates have peaked and bulk of the repricing has been done, it said.