Present funds can feed 18% credit spike

The current lendable resources available with banks are expected to support a credit growth of at least 18 per cent in 2006-07.

Credit expansion in 2006-07 can shoot up to 27 per cent if banks offloaded all their excess statutory liquidity ratio (SLR) investments in government securities, but it would lead to further steepening of interest rates, according to ICICI Securities.

Its is unlikely that the entire excess SLR holdings would get liquidated as most of the current excess investments are by banks which are not very aggressive in credit expansion, particularly retail. Banks like ICICI Bank and State Bank of India primarily led the growth in retail loans in 2005-06.

This means the credit growth could move close to the Reserve Bank of India's target growth of 20 per cent for 2006-07, down from 32 per cent growth witnesses in the quarter ended June 30, 2006.

In its banking sector update "Money Matters", ICICI Securities said "from loans, deposits and investments (figures) declared by the RBI, we estimate that enough resources will be available to support a credit growth of at least 18%. This would shoot up to 27 per cent if banks were to offload all excess securities - of course, that would imply much higher interest rates than at present."

Banks still hold Rs 52,000 crore of excess government securities. With current levels of credit growth, they will not need to buy government bonds to satisfy SLR till the end of this fiscal year and utilise all incremental resources for credit.

ICICI Securities said a sharp decline in credit growth is very unlikely. As a result of financial deepening, the momentum in at least farm credit and retail is likely to continue.

It said there is generally a conundrum of excess liquidity and assumption of rising long-term rates co-existing. The reason is that there is enough overnight liquidity, but banks find it harder to garner long-term deposits that are required to avoid a mismatch with increasing maturity of assets (funding gaps need to be kept in control). In an environment that stubbornly signals rising rates, depositors are loath to lock into higher maturities.

With deposit rates having gone up 50-100 basis points in recent times, the task of pushing up the deposit growth rate from a secular 13-14 per cent to 19-20 per cent at present has been accomplished. "We believe that another round of lending rate increases is on the cards," ICICI Securities said.

Most banks have just started availing refinance from bodies such as the Reserve Bank of India, National Bank for Agriculture and Rural Development, National Housing Bank and Exim Bank. Refinance lines are far from being exhausted.

The simple reason for banks going slow on refinance, which costs 6.5-7 per cent is that even today deposits are coming in at a weighted average cost of 5-5.5 per cent.