Banks prefer to give loans now than buy bonds

Investments to deposits ratio of the Indian banking industry fell to a four-month low as banks allocate more of their existing funds to loans that yield higher returns than bonds.

Data from the Reserve Bank of India (RBI) showed that the investments to deposits ratio is now closer to 29% compared with a recent peak of 30% recorded in August indicating that banks have started shifting their deposits to higher yielding loans as credit demand picks up.

Investment to deposit ratio indicates the amount of deposits that is utilised by banks as investments primarily for loans. As credit growth has picked up, banks have started to increasingly use their deposits. Credit growth is currently at nearly a decade high of 18%; however, deposit growth is almost half at close to 10%. As a result, banks have hiked deposit rates by 30 to 50 basis points. One basis point is 0.01 percentage point.

Banks are, however, being cautious on their deposit hunt and being choosy in the tenure where they are offering a higher rate.
Bank of Baroda (BoB) CEO Sanjiv Chadha for example has been cautioning against a broad-based increase in deposit rates and has expressed confidence the deposit and credit growth will converge.

BoB’s larger peer, SBI has also been conservative in going after deposits. Chairman Dinesh Khara said the bank has enough liquidity to get by without hiking deposit rates.

Much like its peers, SBI’s deposit growth at 10% trailed the 20% growth in advances. Khara, however, said that on a gross basis, the bank has enough liquidity to be able to fund the strong credit growth.

“We have ’40 lakh crore of deposits and ’30 lakh crore of advances. We also have ‘3.85 lakh crore of excess investments that can be liquidated to fund credit growth,” he said.

ICICI Securities in a note after its India Financials Conference said banks are focussed on expanding their granular deposit base as credit growth continues to grow faster than deposits.

“Corporate pricing is getting better with higher credit offtake and drawdown of surplus liquidity. Working capital is stable and some capex-led demand is driving incremental growth. Incremental NIMs are getting better with the passing on of rate hikes. Nonetheless, focus on accelerating the granular deposit engine will put pressure on deposit cost,” ICICI Securities said.

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