Growth in bank deposits is slowing down. From 29.5% at the end of January, bank deposit growth for the year to 14 March was 23%. That’s well below the growth rate a year ago, which was 24.6%.
The deceleration shouldn’t surprise anybody because the extraordinary rise in deposits earlier was partly due to foreign funds coming into the country. Now that this flow has tapered off, deposit growth, too, is coming off its highs. The same thing happened last August when the markets tottered, but the fall was much less steep. At that time, deposit growth fell from 24.5% at the end of June 2007 to 22.9% by end-August.
There is one big difference between the situation last August and now. Last August, the credit-deposit ratio of the banking system was 70.71%. As on 14 March, it was 73.9%. That shows money is far tighter in the banking system.
The saving grace is that the tightness could be a seasonal phenomenon— after all, the credit-deposit ratio was even higher, at 74.54% a year ago, on 16 March 2007. At the same time, it’s worth pointing out that the investment to deposits ratio was higher at 32.06% on 14 March 2008, compared with 31.39% a year ago.
Banks such as State Bank of India no longer have the luxury of generating resources by selling investments in government securities if they are to achieve their ambitious growth targets. That’s why the fall in deposit growth becomes important.
Incidentally, it’s worth noting that inflation now is at around the same level as it was this time last year and the 10-year government bond yield averaged 7.94% in March 2007.
Last Friday, the 10-year bond yield closed at 7.91%. If deposit growth continues to fall, banks may have no alternative but to raise interest rates.
Unlocking value at Tata Chemicals
Not all theories of embedded value are nonsensical. Recently, Tata Chemicals Ltd sold shares of group companies Tata Consultancy Services Ltd (TCS) and Tata Investment Corp. Ltd and raised $125 million (around Rs500 crore) to part-finance its $1 billion purchase of US-based natural soda ash manufacturer General Chemical Industrial Products Inc. (GCIP).
The chemicals and fertilizers company owns small stakes in a number of Tata group companies, and some analysts accounted for it in their sum-of-parts valuation of the company. This seemed far-fetched since these holdings were held as part of the Tata group and there was little likelihood of them being sold as the group already owns less than 50% in most group companies. Of course, the stake in Tata Investment Corp. was transferred to parent company Tata Sons Ltd, and in the case of TCS, promoter holding is in excess of 77%, so the sale of Tata Chemicals’ 0.24% stake didn’t matter.
Also, the company was faced with the daunting task of raising funds for the $1 billion buyout. It has managed a $500 million long-term loan, but another $350 million has come by means of a six-month bridge loan. The funds raised by the stake sale are welcome since it reduces the company’s gearing to that extent. Based on the limited information provided about GCIP, the deal appears to be a good one for Tata Chemicals. Soda ash is in short supply and there are reports that alternative uses for it (such as in the mining of some metals) could lead to a further rise in prices. In fact, soda ash prices had already risen sharply by the time Tata Chemicals finalized its purchase of GCIP.
The acquisition has led to a sharp increase in the company’s market share in the soda ash segment—it now accounts for 14% of the world market, up from 8% earlier. If prices remain firm, Tata Chemicals will be among the biggest beneficiaries. The main worry related to the transaction seems to be the cost of funding, what with the bridge loan still to be refinanced. GCIP’s detailed financials are also not yet known.
It’s unlikely Tata Chemicals would have sold group company shares under other circumstances. Now reports suggest that Tata Motors Ltd may offload its stake in Tata Steel Ltd to part-finance the Jaguar-Land Rover buyout. One positive fallout of the Tata group’s large buyouts is that they seem to be pushing some of its companies to unlock the value of their cross-holdings.
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