No cash: Banks cut back on government paper
Sanjay K Pillai & Vivek Kaul Sunday, February 19, 2006 20:50 IST
MUMBAI: Banks are fast running out of cash to lend - whether to corporates or government. This becomes increasingly clear from a close look at trends in the investment-deposit and credit-deposit ratios over the last six months. While the former is falling, the latter is rising, indicating that banks are investing less in government paper and lending more of available deposits to commercial borrowers, both corporate and retail.
The investment-deposit ratio shows banks investments in statutory liquidity ratio (SLR) instruments (plus other eligible papers) as a percentage of deposits.
According to current regulations, banks have to maintain a minimum SLR level of 25% of net demand and time liabilities (i.e. deposits). A few months ago, this ratio was far above 41% - a good 16 % ahead of requirements. On February 3, 2006, it was down to 36.71%. This suggests that banks are either selling their holdings of government paper to raise resources for lending, or investing proportionately less than their growth in deposits.
“Credit demand continues to be robust despite higher interest rates. We have already told our business development heads to route cash to higher return customers,” says the treasurer of a private sector bank. On a year-to-year basis as of February 3, 2006, credit from banks had gone up by 31.2% to touch Rs 3,28,675 crore.
As is logical, the declining investment-deposit ratio has meant that the credit-deposit ratio has gone up. It touched 70.10% as of February 3, 2006. This means that for every Rs 100 that the bank has in terms of deposits, it is lending Rs 70.10 as credit to create assets for the bank. The credit-deposit ratio as on September 2 last year was 65.41%.
Analysts say the investment-deposit ratio has come down not merely because banks are selling their SLR investments but because they have stopped provisioning for more. This is borne out by the fact that the incremental credit-deposit ratio of many banks in India is now more than 100%. They are literally lending all the money they take in as deposits.
This sends a clear signal that both deposit and lending rates will remain firm - as is evident from the overnight money and short-term government securities markets. Last week, banks were borrowing an average of Rs 17,000 crore from the Reserve Bank’s repo window (See page 20) at 6.5%, which is far above current retail deposit rates. Prices of short-term government paper are falling, which means interest rates will be north-bound for a while. At the 91-day treasury bill (T-bill) auction last Wednesday, yields moved up to 6.69% against 6.56% in the previous week. The 364-day T-bill auction saw a cutoff of 6.81% against 6.74% in the previous auction.
MUMBAI: Banks are fast running out of cash to lend - whether to corporates or government. This becomes increasingly clear from a close look at trends in the investment-deposit and credit-deposit ratios over the last six months. While the former is falling, the latter is rising, indicating that banks are investing less in government paper and lending more of available deposits to commercial borrowers, both corporate and retail.
The investment-deposit ratio shows banks investments in statutory liquidity ratio (SLR) instruments (plus other eligible papers) as a percentage of deposits.
According to current regulations, banks have to maintain a minimum SLR level of 25% of net demand and time liabilities (i.e. deposits). A few months ago, this ratio was far above 41% - a good 16 % ahead of requirements. On February 3, 2006, it was down to 36.71%. This suggests that banks are either selling their holdings of government paper to raise resources for lending, or investing proportionately less than their growth in deposits.
“Credit demand continues to be robust despite higher interest rates. We have already told our business development heads to route cash to higher return customers,” says the treasurer of a private sector bank. On a year-to-year basis as of February 3, 2006, credit from banks had gone up by 31.2% to touch Rs 3,28,675 crore.
As is logical, the declining investment-deposit ratio has meant that the credit-deposit ratio has gone up. It touched 70.10% as of February 3, 2006. This means that for every Rs 100 that the bank has in terms of deposits, it is lending Rs 70.10 as credit to create assets for the bank. The credit-deposit ratio as on September 2 last year was 65.41%.
Analysts say the investment-deposit ratio has come down not merely because banks are selling their SLR investments but because they have stopped provisioning for more. This is borne out by the fact that the incremental credit-deposit ratio of many banks in India is now more than 100%. They are literally lending all the money they take in as deposits.
This sends a clear signal that both deposit and lending rates will remain firm - as is evident from the overnight money and short-term government securities markets. Last week, banks were borrowing an average of Rs 17,000 crore from the Reserve Bank’s repo window (See page 20) at 6.5%, which is far above current retail deposit rates. Prices of short-term government paper are falling, which means interest rates will be north-bound for a while. At the 91-day treasury bill (T-bill) auction last Wednesday, yields moved up to 6.69% against 6.56% in the previous week. The 364-day T-bill auction saw a cutoff of 6.81% against 6.74% in the previous auction.
posted by Vivek at 11:19 PM
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