Banks see profits in rising call rates

Sidbi hikes refinance rates by 50 basis points.

The sky-high call rates, reflecting tight liquidity conditions, have provided a perfect opportunity for some private and foreign banks to make profits by deploying funds in the market (short term) at rates higher than those in the normal lending operations.

This is expected to partly help them to shore up bottomline for the third quarter.

The call rates are still moving in 12-13 per cent, meaning banks have yet to cover their positions. And players (banks) with excess Statutory Liquidity Ratio (SLR) portfolio have used present conditions to partly liquidate bonds and lend them in call market.

The returns from the call market are much higher than those on short-term loans, a senior treasury official with a public sector bank said.

Some domestic banks (private) are offering high rate of 9-9.5 per cent for short-term deposits (30 days). This money is used to lend in call money at attractive rates (around 13 per cent). "This is good opportunity for us to make profit in the short term," said a top private sector bank director.

Banks are under pressure due to the wide gap between the pace of credit off-take and the deposit growth rate. The non-food credit has grown by over 30 per cent but deposits have grown by 22.4 per cent till December 8, 2006, according to the Reserve Bank of India data.

Banks have to also deal with new development such as the RBI's decision to hike cash reserve ratio by 50 basis points to 5.5 per cent to moderate inflation expectations. This step reduces the resources that are with the banks for deployment, analysts said.

The tight liquidity conditions have made commercial banking entities to tap the refinance window provided by the RBI for export credit, Small Industries Developments Bank of India (Sidbi) for SME lending, National Housing Bank for home advances.

"Banks call on us when they face funding pressure and now with tight liquidity, they are tapping refinance window ," a senior Sidbi official said.

"We have raised our rate by 50 basis points to 8.75 per cent, after the RBI decided to revise CRR in the first fortnight of this month," the official added.

NHB has also seen a hike in demand for refinance to the extent of Rs 1,500 crore, especially from banks in the State Bank of India group. The refinancier has however not taken any view on raising refinance rates, a official said.