Indian banks are selling government bonds, held in excess of the threshold they are required to, at the fastest pace in three years to meet credit demand that has recently outrun term deposits.
The pace of sales could send yields higher, affecting Delhi’s cost of borrowing. At the system level, the holding of excess government bonds, or ownership beyond the mandated Statutory Liquidity Ratio (SLR) by banks, is down almost two percentage points.
“The SLR requirement is coming down and demand for credit is also picking up,” said Soumyajit Niyogi, associate director at India Rating. “Banks having good credit demand are offloading their stock of bonds.” In absolute terms, banks have sold bonds worth Rs 1.5 lakh crore since mid-August to fund loan demand.
The investment-deposit ratio, or the ratio of government bond holding in relation with the stock of deposits, has fallen from 30.5 per cent in mid-August to 27.7 per cent in February, Reserve Bank of India data showed. Banks are now required to hold SLR at 19.25 per cent. That still gives them an elbow room of about Rs 5 lakh crore, considering that they also need to keep aside some amount to provide for liquidity coverage ratio (LCR).
The ratio explains that while overall deposits have increased, investments have not gone up commensurately. As a result, incremental investment deposit ratio has touched an all-time low of 5.6 per cent, which means banks have parked only Rs 5.6 in government bonds for every Rs 100 raised as deposits so far, this fiscal.
It makes business sense for banks to go back to their core business of lending: Yield on benchmark government bond is 7.5 per cent, and the MCLR-marginal cost based lending rate is 8.7 per cent.
If banks continue to offload government bond holding, there could be some pressure on borrowing costs.
To be sure, the central bank has purchased government bonds worth Rs 2.2 lakh crore through open market operations, or OMOs, according to Edelweiss Research. This has led to a sharp improvement in durable liquidity in recent months, easing the pressure on rates. Also, the government has the option of using funds from the National Small Savings Fund, and that may not hurt market borrowing rates.