Banks relying on costly market borrowings for lending

Banks are relying more on costly market borrowings instead of deposits to meet credit demand. Experts say that banks are yet to turn aggressive in mobilising deposits on concerns of getting stuck with expensive long-tenor term deposits when the interest rate cycle turns. An ET analysis shows that market borrowings by banks doubled to Rs 4.4 lakh crore in 2022.

“At this point in time, we are watching the next central bank move on the repo rate, so raising funds from the market makes sense because we can tweak the tenure. But with term deposits, there is no scope of repricing,” said a senior official at a private sector bank. “You don’t want to get stuck with really expensive deposits.

Also, at high deposit rates a lot of CASA deposits are also getting converted to term deposits, so it’s a wait and watch mode in switching toward aggressive raising of deposits.”

Banks have sharply increased their market borrowings to lend as core deposit growth has trailed the demand for loans. Such borrowings, in addition to those from inter bank and central bank windows, consist of various kinds of bonds raised from the market. The quantum has risen by 63% or Rs 1,70,773 crore, doubling to Rs 4.4 lakh crore in 2022. Such borrowings rose only Rs 13,576 crore or 5.3% in 2021, the latest Reserve Bank of India (RBI) data showed.

“Deposits are one means of funding, but we also have borrowings, plus we have a high liquidity coverage ratio,” said Sandeep Batra, ED, ICICI Bank. “We are pretty confident that whatever loans we are doing, we will not be constrained by our current liabilities.”

Strong loan demand has pushed the incremental credit deposit ratio to 111% as of December 30, as loan growth touched 15%. Deposits expanded only 9.2%. This implies that fresh loans extended by the commercial banks so far in the current financial year are in excess of fresh deposits banks have raised to fund them.

Outstanding credit deposit ratio at the system level is 75%. Factoring in an 18% statutory liquidity ratio and 4.5% cash reserve ratio, the pressure on core funds is evident.

“We are seeing higher reliance among banks to raise certificate of deposits (CDs) where their share in incremental deposit growth has now increased to 12.7% versus 6.8%in FY22,” said Karan Gupta, director, India Ratings. “While banks have been increasing their deposit rates, they are still lagging the increase in the repo rate.”