Mid-size lenders are trying various ways to meet credit demand

Small private lenders are using different strategies to respond to increased demand for credit in an environment of relatively slower deposit growth. While most banks are focused on raising new deposits with the help of interest rate hikes, a few are shedding excess holdings of government securities to meet loan demand. Non-food credit grew 13.8% year-on-year (year-on-year) and deposits rose 9.8% year-on-year in the fortnight ending July 2, according to data released by the Reserve Bank of India (RBI). The overall credit-to-deposit (C/D) ratio of some banks has exceeded 80%.

N Kamakodi, Managing Director and CEO of City Union Bank, said the difference between loan and deposit growth rates is small and hardly a problem. “For our bank, we can lend up to Rs 3,000 crore even without a single rupee of new deposits. At the same time, we are focusing on our branch network to drive deposit growth, we have increased domestic deposit rates and we will also consider increasing rates on NRI (Non-Resident Indian) deposits,” a- he declared.

RBI’s decision to temporarily remove interest rate caps on additional non-resident foreign currency (bank) [FCNR(B)] and (external) rupee deposits from Non-Residents (NRE), and exempting them from maintaining Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) helps banks attract more money from their NRI customers. This easing will be available for deposits mobilized until November 4, 2022. Bankers said a drop in the landed cost of foreign currency deposits will help lenders in states like Gujarat, Kerala and Punjab, which have large diasporic populations.

BK Divakara, chief financial officer of CSB Bank, ruled out the possibility that banks face asset-liability mismatches, as deposits are not the only way to raise funds. “Most banks are holding much higher excess SLR securities than expected. Now that the demand for bank credit has returned, banks have started to realize these excess securities and fund the demand for credit,” he said. Apart from deposits, banks have other options for raising resources, such as capital funds and refinancing, Divakara added.

Public sector bankers said their institutions were comfortably placed in terms of liquidity. “We don’t feel the need for aggressive rate hikes, but some of the smaller private banks may have to go that route in the current environment,” said a senior executive at a midsize public bank. Now may not be the best time to sell bonds, as market yields tend to rise, he added.

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