Banks encash bond holdings to service rising demand for credit

Banks are selling their surplus stocks of government bonds, Reserve Bank of India (RBI) data shows, as they seek to free up resources to meet demand for loans at a time when deposit growth is slowing.

RBI mandates banks to keep a minimum of 19.25% of their liabilities in risk-free government securities before lending to customers, but many banks have for long maintained a statutory liquidity ratio (SLR) of as much as 30% because credit growth was weak.

With demand for loans picking up, banks are liquidating their excess holdings in government securities. For the fortnight ended 15 February, non-food credit growth stood at 15.6%, while deposits grew at 10%. Bank credit has grown between 10% and 15% every two weeks since last June, while deposit growth was at 6-10%.

For a very long time, banks had kept SLR holdings 10 percentage points above the regulatory requirement, said Ajay Manglunia, head of fixed-income markets at Edelweiss Securities.

He said banks under the prompt corrective action were not able to make capital-intensive investments and, since SLR is risk-free, they chose to park excess funds in SLR bonds.

“In today’s environment, non-banking financial companies (NBFCs) are finding it difficult to lend as they are not getting enough capital from the market. While banks are able to raise money at 7-8%, NBFCs are getting funds at 11-12% at the moment,” added Manglunia.

Bloomberg data shows that banks have cut SLR holdings from 30.8% of their net demand and time liabilities (NDTL) in February 2018 to 26.8% in February 2019. NDTL is the sum of a bank’s deposits and borrowings.

Credit has been growing at a much faster pace than deposits and to add to that, NBFCs are on a sticky wicket as funding remains a challenge, said Karthik Srinivasan, group head at Icra Ltd. “Since the deposit growth has not kept pace, banks have had to cut down on their excess SLR to meet their credit requirements,” he said, adding that there is definitely a slowdown in loan disbursements by NBFCs and housing finance companies, while banks have been growing.

“So, obviously, part of their ability to grow their credit books comes from the fact that they are taking over some of the NBFC assets. As NBFCs are going slow, banks are entering into those segments and that is partly getting funded by monetizing some of their excess SLR,” added Srinivasan.

The credit-deposit ratio of banks has increased in the last seven-eight months and now stands at 77.5% from 74.9% in June 2018. The ratio indicates how much of a bank’s deposit base is being mobilized for loans.

An economist at a large bank who did not wish to be named, said that as more banks come out of the prompt corrective action framework, some of their investments in SLR would be deployed to boost credit growth.

“There has been an increase in the cost of funds denoting a relative scarcity of deposits; banks have adjusted between giving credit and deploying in SLR securities which is the reason for the drop of SLR and rise of credit-deposit ratio,” the person said.

Others say that a rally in government securities allowed banks to book some profit and free up capital. Manglunia said that non-banking financial companies have sharply reduced lending in the last couple of months, since many of them are finding it tough to raise money after the IL&FS default.

“The NBFC crisis has created an opportunity for banks to push up credit and for that, rather than borrowing money from the market, they have been liquidating SLRs,” said Manglunia.

By selling excess SLR, they are not only able to book profits but have also been able to deploy them at a better margin of close to double digits as compared to 7.5% in the government securities market, he said.