Banks tap gilt kitty on red-hot credit demand

Banks have reduced the share of their statutory liquidity ratio (SLR) holdings over the past couple of months, as per Mint calculations based on data from the Reserve Bank of India.

 

SLR is the proportion of deposits that banks have to mandatorily invest in approved securities.

While RBI mandates banks to maintain SLR investments—in government securities and other sovereign papers—of at least 18% of their net demand and time liabilities (NDTL), banks usually maintain 28-29% when credit demand is low.

Facing pressure on the deposit front, banks have now reduced their holdings to 27.4% of NDTL, showed data as on 12 January. In comparison, the SLR ratio stood at 28.1% on 17 November 2023, and at 28.7% on 14 July 2023, as per fortnightly business data released by RBI.

Experts said that based on internal estimates that point to a shortfall in deposits, banks would be selling off SLR securities.

“Given that SLR has come down, it means banks have perhaps sold them in the market. The buyers could have been non-bank players like insurance companies because if the transactions were between banks, then the system SLR number would have remained unchanged," said Madan Sabnavis, chief economist, Bank of Baroda.

This selloff, Sabnavis said, is indicative of the fact that since RBI has not gone for any permanent infusion of liquidity such as open market operations, and as banks are seeing a prolonged deficit, the way out for banks is to sell government securities.

“Anyway, every bank is sitting on 8-9% of excess SLR holdings and (this) is a response to the liquidity situation," said Sabnavis.

The system liquidity deficit recently crossed ₹3 trillion on the back of limited government spending and stood at ₹2.5 trillion as on 28 January, show data from Bloomberg. Banking system liquidity has remained in deficit since mid-September with some intermittent days of surplus in between.

Also, banks have been raising deposit rates to lure customers to park their money, but the difference between the pace of credit and deposit growth seems little changed.

As on 12 January, non-food credit—loans by banks to individuals and companies after adjusting for loans given to the Food Corporation of India (FCI)—stood at 20.4% year-on-year, as compared to a 13% y-o-y deposit growth.

This has led to an increase in the credit-deposit ratio to 77.55%, as on 12 January, up from 75.14% a year earlier. The ratio indicates how much of a bank’s deposit base is being utilized for loans.

Bankers believe it would not be easy to get deposits as all lenders are vying for the same pie. “It will be a war for deposits," Ravi Narayanan, group executive of retail liabilities, branch banking and products at Axis Bank Ltd, told reporters on 23 January.

Axis Bank’s chief financial officer Puneet Sharma said the current liquidity environment would constrain deposit growth for the banking system.

Others too said banks are certainly reducing their SLR investments.

“In order to bridge the gap between deposits and credit, some banks have started selling Gsecs (government securities), but by and large banks are holding on to them," said Ajay Manglunia, managing director and head of the investment grade group at JM Financial.

He said that while a couple of years ago there was enough liquidity in the system and banks were not able to find sufficient demand for credit, the situation has changed now. “Last year, the surplus funds with banks was invested in Gsecs and that has given good returns," said Manglunia.