| A lull in credit disbursals and skewed returns in the money and government bond markets has hit the banks hard, with some analysts estimating banks' aggregate net interest income on incremental deposits in the first quarter of 2007-08 to show a deficit of about Rs 1,000 crore. |
| Fixed deposits at banks increased by over Rs 1,00,000 crore in the first quarter ended June 30, 2007, a large portion of it at rates above 9 per cent under special schemes. |
| A substantial part of the incremental accretion to fixed deposits was also on account of customers shifting balances from savings and current accounts, which effectively earn very low interest of about 2.5 per cent. |
| With outstanding credit actually contracting, the only means of earning returns on the incremental deposits was to invest in government bonds or lend in the overnight call money market. |
| "Banks continued to raise term deposits at higher rates in the quarter ended June 2007. But finding a viable (profitable) option to deploy funds (from incremental deposits) after meeting the credit demand has been a tough call," a senior treasury manager with a large state-owned bank said. |
| The yields on bonds and call rates dropped during the April-June 2007 period but the cost of deposits remained high as most of the banks continued with special drives to mop up resources at high rates. |
| Returns on 10-year government bond have been around 8 per cent, down from 8.40 per cent in the early part of the quarter. |
| Saddled with excess funds, banks lent in the call market at rates lower than the cost of funds. |
| R Narayan, treasury manager with private sector Dhanalakshmi Bank said, "The gap in returns and cost is a short-term issue. It would even out over a longer period." |
| Banks expect the credit demand to gain momentum in about a couple of months from now.
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Banks feel credit slowdown heat
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First Published: Jul 11 2007 | 12:00 AM IST
