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Loan-deposit conundrum for banks

Loan-deposit conundrum for banks
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First Published: Sat, Jan 29 2011. 12 01 AM IST
Updated: Sat, Jan 29 2011. 12 01 AM IST
Mumbai: Top Indian banks, including State Bank of India (SBI) and ICICI Bank Ltd, may have to either go slow in giving loans or increase their deposit base, if they do not want to earn the ire of the Reserve Bank of India (RBI) as their ratio of credit to deposits climbs to levels the central bank is increasingly uncomfortable with.
Raising deposits will come at a cost as bank margins may be hit by at least 10-20 basis points (bps), analysts said. This is because they will have to pay more to attract money. One basis point is one-hundredth of a percentage point.
A Mint analysis of 15 banks, all of whom have announced their results for the quarter ended December, shows Kotak Mahindra Bank Ltd has the highest credit-deposit ratio— 102.11%, up from 96.49% a year ago. This means for every Rs 100 deposit, the bank is lending Rs 102.11.
ICICI Bank’s credit-deposit ratio is 94.92%, but excluding its overseas business it is 75%, IDBI Bank Ltd’s 89.52% and SBI’s 84.19%. The average credit-deposit ratio for Indian banks was 75.22% for the week ended 14 January.
Analysts said the rise in credit to deposits is mainly because banks have not been successful in garnering deposits this quarter. But banks are not too worried. They reason that credit has so far been funded by capital and that should not be a concern.
Mohan Shenoi, treasurer at Kotak Mahindra Bank, acknowledged that the bank’s deposits to overall liabilities ratio is not on a par with other banks.
“We are at 61-62% while for others it is 75-90%. But our non-deposit liabilities include equity capital, tier II capital and refinancing of long-term loans. We are using our capital to fund loans and that should not be a problem,” he said.
Kotak Mahindra Bank’s capital adequacy is 20% after it sold a 4.5% stake to Japan’s Sumitomo Mitsui Financial Group for Rs.1,366 crore in June. The bank issued fresh shares to Sumitomo, and the promoter’s stake came down to 49% from 51%.
Earlier this week, at its quarterly monetary policy review, RBI had referred to the banking industry’s “abnormal credit-deposit ratio”.
“While the Reserve Bank will endeavour to provide liquidity to meet the productive credit requirements of a growing economy, it is important that credit growth moderates to conform broadly to the indicative projection. This will prevent any further build-up of demand-side pressures,” the banking regulator had said.
Paresh Sukhtankar, executive director at HDFC Bank Ltd, said the bank’s credit-deposit ratio is at 82%, but it is not a concern because they have a high capital cushion. “It should be a concern for banks that are borrowing in the call market or are dependent on wholesale deposits. But we have high capital adequacy ratio and 55% current and savings accounts (CASA) and it is not a concern,” he said.
Banks with high CASA ratio have lower cost of funds as they offer no interest on current accounts and 3.5% interest on savings accounts. In contrast, term deposits are offering as high as 9.5% interest currently.
Deposits for ICICI Bank, HDFC Bank and IDBI Bank have fallen by 2.39%, 1.6% and 2.64%, respectively, between September and December, while for SBI it has increased 2.76%. Kotak Mahindra Bank’s deposit base remained almost unchanged.
IDBI Bank has announced that it will slow lending growth to 10% in the last quarter of the current fiscal against RBI’s projection of 20%.
Chaitra Bhat, research analyst with LKP Securities Ltd, said banks such as IDBI, which have seen deposits growing much slower than credit, will ideally like to increase CASA deposits.
“One way to increase the CASA ratio is to reduce dependence on wholesale deposits. But that’s easier said than done. IDBI Bank, for example, has a target of taking its CASA ratio to 18%, from 15% now. But they couldn’t achieve it in Q3 (third quarter),” she said.
Aditi Thapliyal, lead banking analyst at investment bank Execution Noble, in a note earlier this week, had said incremental credit-to-deposit ratio is in the 100%+ range, in spite of a muted recovery in deposit growth numbers towards the end of Q3.
“Skewed deposit versus lending rate growth and consequent funding pressure is likely to translate into net interest margin pressure in the fourth quarter (Q4) of fiscal 2011 for the banking sector,” she said.
Banks are likely to shop for deposits in Q4 to find a balance between credit and deposit growth. Crisil Research, the research wing of the rating agency, expects banks to further hike deposit rates by 25-50 bps across maturities. This follows 100-200 bps hike in bank deposit rates since October.
But Clyton Fernandes, analyst at Anand Rathi Shares and Stock Brokers Ltd, said banks will find it difficult to attract deposits as real interest rates continue to be negative due to high inflation.
“We have to also look at the bank’s investment to deposit ratio because banks can also liquidate investments to feed credit. High credit to deposit will only be a problem if bank’s investment to deposit falls,” he said, while pointing out that most banks have invested more than 30% of deposits, while for some banks dependent on wholesale deposits, such as Yes Bank Ltd, it is as high as 38%. Fernandes argues that these banks can easily liquidate investments if they need cash to fund credit.
Kajal Gandhi, assistant vice-president at ICICI Securities Ltd, said margins will compress 15-20 bps as banks increase deposit rates while lending costs are not entirely passed on.
Crisil Research expects the pace of credit growth to moderate to around 20-21% by March, due to the gap between credit and deposit growth, and the high base of Q4 of 2009-10.
Ashwin Ramarathinam contributed to this story.
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First Published: Sat, Jan 29 2011. 12 01 AM IST
More Topics: RBI | SBI | Kotak Mahindra | ICICI Bank | Mohan Shenoi |