The fall in interest rates is showing its impact on lending and deposit activities of banks.
According to the latest data released by the Reserve Bank of India (RBI) On Wednesday, for the first time in nearly three months, the deposit base of scheduled commercial banks, including regional rural banks, has shrunk. During the fortnight ended March 13, deposits dropped by Rs 3,362 crore against an increase of Rs 49, 891 crore in the previous 14-day period.
This is the second year in a row when deposits have shrunk in the first fortnight of March. However, in the corresponding period between 2004 and 2007, deposits grew between Rs 9,500 crore and Rs 20,500 crore. Typically, during March, banks see a large build-up in deposits.
Bankers said a part of the reason for the fall in deposits this time was depositors shifting cash from banks to other investment tools to take advantage of the tax benefits available on instruments such as public provident fund and life insurance policies.
At the same time, they pointed out that demand deposits, which have a tenure of less than a year, went up by Rs 1,580 crore during the fortnight, while time deposits fell by Rs 4,943 crore. In recent months when banks were offering higher interest rates to mop up deposits, there was a higher build-up in time deposits than demand deposits as depositors wanted to earn higher returns.
Since December, banks have started lowering deposit rates following a series of measures initiated by the RBI to lower the cost of funds.
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Besides, a banker said, banks that have a comfortable liquidity situation were also lowering deposit rates as they were going slow on lending and it did not make sense to mop up money at higher rates and park them in government securities, which was not an attractive option at the moment given the rise in yields.
Loan flow up Rs 22,423 cr
On the lending side, banks continued to sanction more loans as more lenders queued up partly due to lower cost of funds and to meet higher working capital needs.During the fortnight ended March 13, loans sanctioned by scheduled commercial banks (SCBs), including regional rural banks, went up by Rs 22,423 crore. This was the third fortnight in a row when credit flow went up.
“There is a large demand from companies that have to meet their credit requirements, particularly as funds flow out due to advance tax payments,” said Union Bank General Manager V K Khanna.
But on a year-on-year basis, credit growth fell. During the year up to March 13, loans disbursed by SCBs was estimated to have grown by 18.13 per cent to Rs 26,90,513 crore, as against 21.6 per cent in the corresponding period last year.
The credit growth so far this year is lower than RBI’s revised projection of 24 per cent for 2008-09, which was based on the assumption that demand would shift to Indian banks as flow of funds from overseas and equity markets had dried up.
“The absence of some large banks from the retail market is affecting credit flow,” said IndusInd Bank Managing Director and CEO Romesh Sobti.
| MONEY TRAIL Incremental growth in credit, deposit & investment in government securities (Rs crore) | |||
| Fortnight | Credit flow | Deposit mobilisation | SLR investment |
| Oct 10 2008 | 64,937 | 27,221 | –6,533 |
| Oct 24 2008 | 7,637 | 16,862 | 71,226 |
| Nov 07 2008 | 19,852 | 30,756 | 18,934 |
| Nov 21, 2008 | –2,193 | 2,616 | –2,202 |
| Dec 5, 2008 | 9,409 | 33,294 | 38,334 |
| Dec 19, 2008 | 2,419 | -6,081 | 20,161 |
| Jan 2, 2009 | 14,468 | 69,956 | 62,262 |
| Jan 16, 2009 | -13,837 | 11,316 | –7,697 |
| Jan 30, 2009 | -8,822 | 38,722 | 25,560 |
| Feb 13, 2009 | 10,445 | 17,172 | 6,649 |
| Feb 27, 2009 | 21,307 | 49,891 | 15,128 |
| Mar 13, 2009 | 22,423 | -3,362 | -3819 |
“Companies are borrowing funds to meet higher working capital needs as certain sectors are showing higher demand. In addition, they have to manage inventories and receivables. In the last few months, there was demand for funds from the housing sector, which was completely missing for a while,” added an executive of another private bank.
The food credit declined by Rs 528.14 crore to Rs 47,902 crore for the fortnight under review mainly due to the fall in procurement by the Food Corporation of India (FCI).
SLR investment down Rs 3,819 cr
With a higher demand for funds and lower deposit mobilisation, bank investment in government and other approved securities that qualify for treatment of statutory liquidity ratio (SLR) fell by Rs 3,819 crore during the fortnight.
What also deterred investment in government securities was the rise in yields and the consequent erosion in the value of the portfolio. As a result, there was increased interest in instruments issued by mutual funds and corporate bonds, though the latest data were not available.
With deposits falling at the system level, SLR, which is fixed at 24 per cent of the net demand and time liabilities, the need for such investment also declined marginally.