Credit-deposit ratio climbs back to pre-demonetisation levels

Weak credit growth and a significant uptick in deposits post demonetisation that had led credit-deposit ratio in the banking system slip to 70-73 per cent levels in the ensuing quarters, has inched up in the December 2017 quarter. Deposit growth moderating to 3.5-4 per cent levels and credit offtake clocking a double digit growth in the quarter has seen credit-deposit ratio inch up to 75 per cent levels. The ratio continues to remain healthy in March 2018 as per the latest data available.

As a fallout of this development, public sector banks that have been net buyers in government securities through most of the current fiscal (2017-18), have turned net sellers in the past three months. Data from the Clearing Corporation of India (CCIL) shows that PSU banks have been net sellers in government securities to the tune of around ₹13,500 crore in the Jan-March quarter 2018 (until week ended March 16); between April and December 2017, PSU banks have net bought government bonds for about ₹63,300 crore.

Inching up

Through 2014, 2015 and up until the June quarter of 2016, credit deposit ratio had been in the 76-78 per cent range, implying that banks were able to deploy around ₹76 or ₹78 out of every ₹100 deposit as loans; the rest was parked in government securities and other investments.

Post demonetisation in November 2016, as deposit growth spiked and credit growth slipped to 5-7 per cent levels, credit deposit ratio fell to 71-73 per cent. Instead, investments in SLR securities (essentially G-Secs) grew significantly.

Data put out by CCIL, shows that investments in SLR securities grew by a robust 34 per cent and 23 per cent YoY in the December 2016 and March 2017 quarter.

Flush with funds, public sector banks in particular have been net buyers in 2017-18, despite yields on G-secs shooting up by over a percentage point since August 2017.

But after net buying of G-Secs to the tune of ₹69,000 crore and ₹61,100 crore in the September and December 2017 quarter respectively, PSU banks have become net sellers in the Jan-March 2018 quarter. Muted growth in deposits and continued pick up in credit offtake have possibly led PSU banks to sell their government securities.

The deposit growth for PSU banks has been minuscule in the December 2017 quarter—at 0.9 per cent from 6.9 per cent in the September quarter. Credit growth, on the other hand, has moved up to 6 per cent from a muted 2 per cent during this period.

For private sector banks, on the other hand, deposit growth continues to remain healthy at 14-odd per cent; credit growth of 20-24 per cent too is much higher than that of PSU banks. Interestingly, private sector banks have remained net sellers in government securities through most of 2017-18 (around ₹11,200 crore until March 16, 2018).

Earnings impact

While buying of government securities had aided PSU banks’ earnings in the September 2017 quarter, marked-to-market (MTM) losses on AFS portfolio (available-for-sale) hurt profits in the December quarter. Banks have to report mark-to-market investments held under AFS at quarterly or at more frequent intervals. Many PSU banks had reported provisions on investment depreciation in the December quarter— SBI (₹4,044 crore), PNB (₹1,075 crore), Bank of India (₹906 crore), Canara Bank (₹874 crore)— to name a few.

In the January-March quarter, PSU banks may incur treasury losses on the sale of G-Secs, and also report MTM losses. After going up by 70 bps in the December quarter, yield on 10-year G-Secs have gone up further by 30 bps in the March quarter.