Banks change tack, push for loans instead of investments

Banks have been reducing their investment in non-statutory liquidity ratio (SLR) portfolio and diverting funds to expand the lending basket. Bank officials and analysts attribute the trend to hardening of interest rates and banks' current focus on core activities.

"With interest rates hardening, banks would have to take a hit to their bottomline while doing mark-to-market," said G V Nageswara Rao, chief executive officer of IDBI Ltd's commercial banking special business unit.

Bank investments fell by around Rs 2,800 crore between March and August while non-food credit increased by around Rs 85,900 crore as on week ended August 5 compared with around Rs 49,400 crore in the same period last year.

Besides, the regulator wants banks to focus more on core banking activity especially when banks were making large treasury profits on falling yields, two years back, said Ajay Mahajan, group president, financial market and private banking at Yes Bank. "With huge demand for credit, banks are focusing on core banking activity to strengthen their balance sheet," Mahajan said.

Banks would also have to make provisions for the interest rate risk or convert the bonds into held-to-maturity to grow their investment portfolio, said a banking analyst at a Mumbai-based brokerage firm.

Besides banks, companies are preferring the loan route to the bond route. "It is difficult to raise big amounts from the bond market," said Hindalco treasury head A R Das.

In March, Hindalco borrowed Rs 5,000 crore from 20 banks including IDBI Bank, Punjab National Bank, and Bank of Baroda. Explaining the logic for not going for a bond issue, Das said, "this arrangement provides us the flexibility of term loan and pricing."

The largest aluminium maker would have the facility to repay the loan within five years. "We are one of the first companies to move away from bond market to loans," Das said.

Companies also evaded the bond market as interest rates have been going up in the current financial year. "Issuing a bond involves interest rate risk," the analyst said.

"The term loans can be repaid from company profits, which are growing at almost 30 per cent every year, but in bonds, it is difficult to redeem it before the maturity period," said Anand Kuchelan, banking analyst at Pioneer Intermediaries.

Infrastructure Lending

Aiding this strong growth in credit is strong industrial demand for infrastructure projects. "Most of the corporate loans are for capacity building or for working capital now as companies are building additional capacities to expand their projects," said Union Bank of India chairman and managing director K Cherian Varghese.

The working capital loan is linked with the prime lending rate and the interest rate is higher than the long-term loans. However, with strong industrial growth, companies can repay the amount in a short time, the analyst said. "The new trend would lead to a surge in corporate lending," said Kuchelan.

Credit demand

In order to match the huge credit demand, banks are selling the excess profitable SLRs and infusing the amount into loans, Rao said."There are no interest rate hedging facility in India and so banks are trimming their bond portfolio," Rao said.

The higher premium on working capital loans are jacking up the interest incomes of banks, said J Moses Harding, executive vice-president of IndusInd Bank. "The interest incomes are also rising due to the conversion of the flow from investment to loans," Harding said.

CD surge

With bank deposits growing at a lower rate than credit, banks are increasingly issuing certificate of deposits (CD) that are marketable and have lower interest rates than corporate deposits, Mahajan said.

According to RBI data, the certificate of deposits issued by banks have surged by nearly three times to Rs 20,509 crore in July from Rs 5,529 crore in July 2004.