Banks such as ICICI Bank and Punjab National Bank(PNB), which had higher loans growth, may have to slow down their lending or raise deposits substantially as the Reserve Bank of India begins to steps in to curb excessive lending.
The credit-to-deposits ratio widened to 102% this December, from 58% a year-ago, reflecting a situation where loans are rising faster than deposits that could destabilise banks and financial system. With the economy growing at 8.9%, demand for loans has risen 24%, a four percentage points more than the central bank’s target.
But deposits are rising at 16.5%. Banks have been raising deposit rates by over 150 basis points, but still not enough to fill the gap.
Credit-to-deposit ratio, or the proportion of loans lent from deposits received, is an indication of the asset liability mismatch of banks. Typically, the ratio lies between 65% and 70% for most banks. A ratio in excess of 100% is not sustainable and could result in liquidity crisis, as banks will not have enough funds to support the loan book growth. ICICI Bank had reported a credit-to-deposit ratio of 95% for the December 2010 quarter, PNB posted 77%.
In the December 2010 quarter, the liquidity position was consistently tight with average daily net injection of liquidity rising to Rs 120,000 crore in December from Rs 62,000 crore in October 2010.
Nine-months ago, banks had excess liquidity of Rs 100,000 crore. Much of this was sucked out by the demand for funds from the telcos to bid for 3G spectrum and broadband wireless and also the advance tax payments. With inflation being high, people did not find deposits attractive enough as deposit rates were lower than inflation.
An easing inflation coupled with another round of deposit rate hike might make deposits attractive, thereby, increasing the overall deposit growth in the system.
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