Smaller private lenders are using different strategies to meet an increased demand for credit in an environment of relatively slower deposit growth. While most banks are focusing on raising fresh deposits with the help of interest rate hikes, a few are shedding excess holdings of government securities to cater to loan demand. Non-food credit grew 13.8% year-on-year (y-o-y) and deposits grew 9.8% y-o-y during the fortnight ended July 2, as per data released by the Reserve Bank of India (RBI). The overall credit-deposit (C/D) ratio for some banks has crossed 80%.
N Kamakodi, managing director & CEO, City Union Bank, said that the difference between credit and deposit growth rates is small and hardly poses a challenge. “For our bank, we can lend up to Rs 3,000 crore even without a single rupee of fresh deposits. At the same time, we are focused on our branch network to boost deposit growth, we have hiked domestic deposit rates and we’ll also consider raising rates on NRI (non-resident Indian) deposits,” he said.
The RBI’s decision to temporarily remove interest rate caps on incremental foreign currency non-resident (bank) [FCNR(B)] and non-resident (external) rupee (NRE) deposits, and exempt them from the maintenance of cash reserve ratio (CRR) and statutory liquidity ratio (SLR) is helping banks attract more money from their NRI clients. This relaxation will be available for deposits mobilised up to November 4, 2022. Bankers said that a fall in the landed cost of foreign currency deposits will help lenders with a presence in states like Gujarat, Kerala and Punjab, which have sizeable diasporic populations.
BK Divakara, chief financial officer, CSB Bank, ruled out the possibility of banks facing asset-liability mismatches as deposits are not the only route for fund mobilisation. “Most banks are holding surplus SLR securities far higher than mandated. Now that demand for bank credit has come back, banks have started realising these surplus securities and funding the credit demand,” he said. Apart from deposits, banks have other options for raising resources, such as capital funds and refinance, Divakara added.
Public sector bankers said their institutions are comfortably placed in terms of liquidity. “We don’t feel the need for aggressive rate hikes, but some of the smaller private banks may have to take that route in the current environment,” said a senior executive with a mid-sized state-owned bank. This may not be the best time to sell bonds as market yields are trending upwards, he added.