Bankers confident about funding credit growth from sources other than deposits.
The Reserve Bank of India (RBI) on Tuesday raised concern over the widening gap between credit and deposit growth rates. It said it would prevail upon banks with an abnormal incremental credit-deposit ratio to ensure a balance.
“We asked banks to increase the deposit (growth) and restrain the credit (growth). Credit and deposit growth rates have to be aligned. We have said we would monitor this closely and use our supervisory responsibilities to ensure that banks which are far out of line are brought in line,” RBI Governor D Subbarao said while addressing a press conference after announcing the policy. The incremental non-food credit-deposit (CD) ratio had risen to 102 per cent by December-end, due to the widening gap between credit and deposit growth. In the corresponding period last year, the ratio was 58 per cent.
Use of funds
Bank chiefs, however, said they’d been using excess liquidity and alternative sources to fund their credit growth.
“RBI’s concern is not on credit growth but on how banks fund this growth. Last year, banks had surplus liquidity and were parking a surplus of around Rs 1 lakh crore in the reverse repo window daily. So, the high credit growth now is a reaction to that surplus liquidity,” said SBI Chairman O P Bhatt.
Bhatt said though deposits were a major source of funds, they were not the only source. “We have capital, profit, Tier-I, Tier-II, for example. SBI is coming out with a Rs 2,000-crore bond issue in this quarter and we may use that to fund growth.” He said the current CD ratio should be around 70 per cent.
“One way of funding the incremental credit is some incremental excess liquidity in the system. The incremental credit-deposit ratio has gone up by 100 per cent because last year this time we were at a liquidity surplus of Rs 1 lakh crore,” said K R Kamath, chairman and managing director of Punjab National Bank.
He, however, added the main anxiety of RBI was whether banks were using daily borrowings to fund their credit growth, which can create a systemic problem tomorrow. “So, RBI wants banks to find long-term resources to fund your business,” he said.
RBI for caution
So far in the year, while credit has grown by 24 per cent, deposits have grown by 16 per cent, as against RBI’s projection of 20 per cent and 18 per cent, respectively. RBI said rapid credit growth without an equal increase in deposits was not sustainable.
It asked banks to moderate credit growth to 20 per cent to prevent any further build-up of demand-side pressure. Chanda Kochhar, managing director and CEO of ICICI Bank, said RBI wanted banks to do a good job on asset & liability management (ALM), as also liquidity, and not go overboard on only providing funds. “As of now, credit growth is well diversified and banks are managing ALM in a manner that they’re able to fund credit growth looking at all possible long-term sources of funds.”
On a year to date basis, the incremental credit-deposit ratio was not high, said M D Mallya, CMD of Bank of Baroda. “The liquidity that was available at the beginning of the year has been used. Banks will be able to fund the requirement, going forward.”
Bankers sounded confident about mobilising funds for credit growth. More, they ruled out any immediate rise in lending or deposit rates. “There has been an upward bias for some time. Most banks have increased PLR (prime lending rate), base rate and deposit rates,” said Bhatt. Most banks increased their base rates by 25-100 basis points between July 2010 and January 2011. Base rates of 67 banks, with a share of 98 per cent in total bank credit, were in the range of 7.5-9 per cent in December 2010. The base rate system had replaced the Benchmark Prime Lending Rate system from July 1, 2010.
