Banks eye new ways to fund credit growth

Banks are finding new ways of funding the high level credit growth, with lagging deposit accretion making lendable resources scarce and ahead of expected liquidity squeeze in the January-March 2007 quarter.

Bankers said foreign currency deposits are being swapped by banks into rupees to meet the escalated demand for credit. Swapping of foreign currency deposits helps banks generate rupee liquidity and also to enjoy higher interest margins on rupee loans.

The interest earned on rupee loans is higher than the returns on foreign currency loans and also the cost of swapped funds works out to be cheaper than rupee resources.

The cost of dollars swapped into rupees works out to 7-7.5 per cent for one year. London Interbank offered rate (LIBOR), the international interest rate benchmark, has also been falling over the last few months. The six-month LIBOR has fallen to 5.33 per cent in December from 5.55 per cent in August-September. On the other hand, banks across the board are paying 8-8.5 per cent for raising one-year rupee deposits.

Banks enjoy 1-1.5 per cent higher interest margin if the foreign currency resources are used to lend in rupees.

While banks are struggling to cope with the wide gap in the growth of deposits and borrowings, triple A rated corporates are giving banks a tough time on their loans accounts.

Most of these corporate had availed floating rate sub-PLR loans and linked them to yields on government securities.

With the yield on the government securities having fallen sharply, the corporates are negotiating hard with the bank for resetting their loans at lower rates. In the process, the banks are increasingly compensating the squeeze in yields on loans to triple-A rated corporates by charging higher rates on loans to retail and small and medium sectors, a banker said.

The yield on the 10-year government security has fallen to around 7.40 per cent from the highs of 8.50 per cent in May-June.

Banks are of the view that after the payment of the advance taxes in December, the market may witness a strain on liquidity given the continuing high demand for credit. Banks' non-food credit has grown by over 29 per cent year-on-year so far against 19 per cent growth in deposits.

Even if the banks are now allowed to raise overseas funds up to 50 per cent of their tier I capital, the enhanced limit includes export credit which has been a damper.

Most of the banks have raised this issue with the RBI requesting for a review for deleting export credit from the overall limit of overseas borrowing.