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Last Updated : Jul 25, 2011 07:55 PM IST | Source: Reuters

Banks seek alternative investments as credit offtake slows

Indian lenders, which have seen deposits sharply outpace loan growth in the June quarter, are likely to increase investment in short-term paper or step up their government bond purchases.

Indian lenders, which have seen deposits sharply outpace loan growth in the June quarter, are likely to increase investment in short-term paper or step up their government bond purchases.

Bankers are exploring these avenues to park funds ahead of an expected pick up in credit demand in the fiscal second half that begins October.

"The alternative (to loans) will be placing the funds in either reverse repo or in liquid mutual fund or something like that. Increasing SLR holding is also a possibility," said Ravi Kumar, chief financial officer at Bank of India.

Statutory liquidity ratio (SLR), or the portion of deposits banks are mandated to invest in government debt stood at 29.21% as of July 1, substantially higher than the mandated 24%.

The Reserve Bank of India (RBI) has capped banks' investment in liquid debt schemes of mutual funds with weighted average maturity of not more than one year at 10% of bank's net worth, but lenders with headroom are seen parking funds in such schemes.

Latest data from the Reserve Bank of India showed bank deposit has grown 5.4% in the first three months of the fiscal beginning in April, compared with 3.2% in the corresponding period last year.

Loan growth to pick up

Some lenders said though credit offtake is slower now, the deposits mobilised will be used when the demand for loans pick up, likely in the second half of the fiscal.

"For the future lines which are going to be availed, we need to have the deposits. It is a continuous process," said M. Narendra, chairman and managing director, Indian Overseas Bank.

"Also, if the interest rates are going to be high for sometime, we should take deposits when (deposit) rates are fairly moderate."

He expects inflation to remain high for at least another six months, which is likely to put pressure on the RBI to further increase its key policy rate.

The RBI is expected to raise its repo rate by a further 25 basis points after inflation quickened in June and may hike once more by the end of the year, before pausing its long tightening campaign, a new Reuters poll showed.

Banks credit growth has been slower at 3.7% in the June quarter, compared with 5% in the year-ago period, prompting lenders to suggest to the central bank to pause its rate hike cycle.

However last year, demand for funds from telecom companies for third-generation spectrum and broadband wireless licence payments, pegged at about 1.06 trillion rupees, fuelled credit offtake.

"I don't think there has been any peculiar sectoral activity in the June quarter, like it happened in the year-ago quarter where telecom licenses were given and had to be taken up on loans," a senior official of a private bank who did not wish to be named said.

The official said banks might be wanting to protect their net interest margins by avoiding further rate hikes which may slow loan growth.

"High rates hurt banks. So when its hurting, the demeanour and presentation will be to mitigate the hurt and not accentuate it," he said.

Large private banks such as Axis Bank, Kotak Mahindra and HDFC Bank expect their loan books to grow at a faster pace than the industry average.

Bankers said they were seeing some demand for loans from sectors such as agriculture, small and medium enterprises, and large corporates.

Demand from rate sensitive sectors such as auto and housing could have seen some slowdown, lenders said.

State-run Union Bank of India has cut credit and deposit growth target for FY12 in the face of slackening demand to 19% and 17% from its previous estimates of 22% and 19% respectively.

The RBI estimates loan and deposit growth for the current fiscal at 19% and 17% respectively.

First Published on Jul 25, 2011 05:33 pm