Banks lean on bond market to meet increased credit demand

Balancing between deposits and credit

Banking

It’s a catch 22 for the banks today. As of December, their credit outflow climbed by 17%. However, their deposits crawled up by merely 9%. The banks are in no position to solicit more deposits offering higher interest rates, as that would impact their net interest margin (NIM), and their financial health, thereof. This has them leaning more heavily on debt to keep pace. The question though is, can they attain their goal on this route, (given the global recession that the country can’t remain immune to for long)?

According to an ICRA report, credit expansion was impressive at Rs10.6 lakh crore, representing a decadal high YoY growth of over 17.6%, as on November 18. Bank profits are good presently, so raising money through capital bonds, is the right decision, say industry observers.

Banks like SBI and HDFC raised money through 10-year bonds in December. HDFC bank floated bonds in two tranches, each comprising Rs 10,000 crore and having yields of 7.86% and 7.84% respectively.

Similarly, the public sector lender, SBI raised debt worth Rs 17,000 crore through a perpetual bond with a yield of 7.75% and a 10-year infrastructure bond at 7.51%.

Union Bank, Punjab National Bank, Bank of India and Bank of Maharashtra have also taken this route to raise money, in the recent past.

In fact, SBI is likely to return to the market this quarter, with perpetual bonds worth Rs 10,000 crore and infrastructure bonds of Rs 10,000 crore. It has the requisite board approvals in place for this.

Talking to Deccan Herald, Ajay Manglunia, MD & Head, Investment Grade group, JM Financials, said, “Even at this yield, raising money by banks is a very appropriate call, keeping in view the yield of 10-year government bond, which was currently hovering at 7.30-7.45 levels.”

Though the ongoing global recession is a concern, India, at the moment, is not part of it because of stability in its economic policy.

However, in case, the global recession persists for a remarkable period of time, then the economic growth of India may become a bit slower, which may be a matter of concern for the money raised by the banks in the future, Manglunia warned.

Banks have to ensure the rate of return to the depositors, pegged to the current inflation level, to lure them. Lately, lots of investments have gone to equity markets (either directly or through mutual funds) chasing better returns.

M Narendra, former CMD, Indian Overseas Bank, noted, “The money in circulation has gone up recently. If people stick to digital mode of payment, additional money could flow to the banks.” Banks should also offer better returns to the depositors to develop a long-term relationship with them, while also maintaining better NIM, he added.

The October-December quarter has witnessed the highest quantum of bonds’ sales by Indian banks, since 2011, in the corresponding period. Issuers raised Rs 2.7 lakh crore ($33 billion) via debt sales, according to Bloomberg-compiled data.

Lenders including Axis Bank and HDFC Bank drove the deal rush, as the benchmark 10-year government bond yield fell by about 10 basis points - the biggest quarterly decline in a year and a half, said a Bloomberg report.

Hariharan MV, retired DGM, SBI, said, “Banks are raising money through debt so as to meet their capital adequacy requirement (CAR) too, which as of now stands at 9.5% in tier-I.” Yet, they may find it difficult to service the debt in the future, in case the global recession hits the country’s economy eventually, he added.

Anil Kumat Bhansali, Head of Treasury, Finrex Treasury Advisors, explained, “The banks have sufficient SLR (statutory liquidity ratio) holdings which they can easily reduce to fund the difference between deposit growth and advances outflow. The excess holdings as on August 26, 2022, was 8.8%, which should give them the leverage to disburse loans without actually raising the interest on deposits.”

There are banks that have raised their deposit rates in the recent past. But such banks are few in number.

For example, state-run lender Bank of Baroda increased its deposit rates on Domestic Retail Term Deposits, including NRO and NRE Term Deposits, by up to 65 basis points across various tenures. These rates are applicable on deposits below Rs 2 crore, with effect from December 26.

Interest rates have also been hiked on the special scheme Baroda Tiranga Plus Deposit Scheme.

The bank has increased retail term deposit interest rates for the second time this quarter, including up to a 100 bps hike in November.

Now, the issue is - will the banks get a better yield if they continue to raise money through the issuance of bonds? Hopes are being pinned on the confidence exuded by industry such as Assocham insisting that the Indian economy will remain on steady ground, helped by strong domestic demand, a healthy financial sector and improved corporate balance sheets.