rbi: Banks now prefer to lend rather than buy bonds

India’s banking sector’s investment-to-deposit ratio fell to a four-month low as banks allocate more of their existing funds to loans, which have higher yields than bonds.

Data from the Reserve Bank of India (RBI) showed that the investment-to-deposits ratio is now closer to 29%, compared with a recent peak of 30% recorded in August, suggesting banks have started to reallocate their deposits to higher-yielding loans when credit demand surges.

The investment to deposit ratio indicates the amount of deposits used by banks as investments mainly for lending. As credit growth has accelerated, banks have started to increasingly leverage their deposits. Credit growth is currently at 18%, a nearly 10-year high; However, deposit growth is almost half at nearly 10%. As a result, banks have raised deposit rates by 30 to 50 basis points. One basis point corresponds to 0.01 percentage points.

However, banks are cautious in their deposit hunt and picky about the term when offering a higher interest rate. Bank of Baroda (BoB) CEO Sanjiv Chadha, for example, warned of a broad-based hike in deposit rates and expressed confidence that deposit and loan growth will converge.

BoB’s larger competitor, SBI, has also been conservative in tracking deposits. Chairman Dinesh Khara said the bank had enough liquidity to go without raising interest rates on deposits.

Similar to its peers, SBI’s deposit growth of 10% lagged the 20% growth in prepayments. However, Khara said the bank has enough liquidity on a gross basis to fund the strong loan growth.

“We have 40,000,000 deposits and 30,000,000 advances. We also have 3.85,000,000 excess investments that can be liquidated to fund credit growth,” he said.

ICICI Securities said in a note following its India Financials Conference that banks are focused on expanding their granular deposit base as loan growth continues to grow faster than deposits.

“Corporate prices are improving as borrowing increases and excess liquidity is drained. Working capital is stable and some investment-driven demand drives incremental growth. Incremental NIMs get better as interest rate increases are passed on. Still, focus on accelerating the granular deposit engine will put pressure on deposit costs,” said ICICI Securities.