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Informist, Tuesday, Oct. 1, 2024

 

MUMBAI – In the wake of banks' struggle to raise fresh deposits even as credit growth remains robust, they will continue to issue certificates of deposits to meet credit demand, rating agency ICRA said in a webinar Tuesday. It also said banks are preferring short-term borrowing over long-term, owing to an expected rate cut by the Reserve Bank of India, contributing to the surge in CD issuances. 

 

Citing the reasons for the surge in CD issuances, one of the panelists said he agrees to the point that banks' unwillingness to raise retail term deposit rates is leading to a rise in CD issuances and bulk deposits. In September alone, banks raised funds to the tune of INR 1.45 trillion, 76.8% higher than in August and almost double the amount raised in September last year, according to data compiled by Informist. This was also the highest issuance since June, when banks raised INR 1.49 trillion. 

 

Apart from issuing CDs, banks are also tapping the infrastructure bond market to address the ongoing deposit crunch. "Some of the larger banks have been opting for infrastructure bonds as it gives them some advantages on the resources and asset liability management front, especially given the fact that these bonds are exempted from the statutory liquidity ratio and cash reserve ratio requirements," K. Ravichandran, chief rating officer at ICRA, said.  

 

In the current financial year, State Bank of India has issued infrastructure bonds worth 200 bln rupees, while Bank of Baroda and Canara Bank have raised 100 bln rupees each. Bank of India, Bank of Maharashtra, and Indian Bank, among others, also raised funds through infrastructure bonds.

   

Asked about the outlook on banks' net interest margin amid the fall in retail loans and the new liquidity coverage ratio norms, the rating agency said, "There may be a few basis points impact on their profit margins. But by and large, I think the banking system and the NBFC (non-banking finance companies) sector have been in good shape." 

 

The share of retail loans in the portfolios of lenders, particularly non-banking finance companies, has fallen after the Reserve Bank of India increased the risk weights on unsecured personal loans.   

 

It also said the return on equity for the banking sector has softened, followed by a slowdown in credit growth. ICRA estimates the return on equity for the banking sector for 2024-25 (Apr-Mar) in the range of 13.2-14.3%, down from 16% in FY24. "There are other factors playing out as well, such as deposit rates may not come down as much, whereas at some point in the current financial year, there might be a possibility of lending rates to soften due to policy actions by the regulator and the competition from bond market," the rating agency said.   End

 

Reported by Christina Titus and Kabir Sharma

Edited by Avishek Dutta

 

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