Lenders no longer indulge in lazy banking: RBI data

In a sign that banks are perhaps getting more comfort from the stickiness of their deposits after demonetisation, the incremental credit-deposit (CD) ratio has crossed 100, while the incremental investment-deposit ratio has been falling steadily and was as much as negative 230 on July 7.
 

This means that banks are lending whatever amount of deposits is coming on an incremental basis, often liquidating their investment portfolio.

The incremental CD ratio never crossed 100 before, at least since 2011, according to the data with the Reserve Bank of India (RBI). The last time the investment-deposit ratio was in negative territory was in April 2016.

The ratios paint a vastly different picture of what the general perception is about the banking system. It is perceived that banks are getting risk averse in lending and resorting to lazy banking, which is putting all their money in government securities. The perception also exists because the ratio of investment to deposits of banks has remained steady at a little more than 30 per cent for some time now, except for in December and January when banks parked their huge deposit-induced liquidity in government bonds (that time the ratio crossed 34).

Banks' mandatory requirement of government bond holding is just 20 per cent. But in the absence of a healthy credit demand, the lenders are maintaining excess bond holding, of over 10-11 percentage points than the requirement.

However, the CD ratio, at least since April, is painting a contrary picture to the lazy banking allegation. This may also explain why State Bank of India (SBI) and Bank of Baroda cut their savings rate by 50 basis points earlier this month. The move is expected to be followed by public sector banks that have seen huge deposit mobilisation after demonetisation and have now seen most of those money getting invested in banks in formal instruments like fixed deposits.

The idea now, according to a senior bank official, is to lower the lending rate sharply so that companies are encouraged to borrow and start investment activities.

"Banks have now a fair idea of the sticky deposits after demonetisation. Perhaps whatever we are left with by now is the amount of deposits that generally we would enjoy in the coming days, too. Now the focus should be on making loans cheap enough for the corporate side," said a treasury head of a public sector bank who did not wish to be named.

This also indicates that lending rates are set to fall steeply in the coming months, but banks would still wait to see how much of deposits will stay with them after a savings rate cut.

"A lending rate cut is a bit far away for companies. But we are heading that way," said another senior PSB official. This is exactly what RBI Governor Urjit Patel had said in his post-policy conference.

Patel said while banks had lowered rates in highly competitive areas, such as auto and housing loans, there was more scope to cut rates in areas where the rates were still high. While he didn't name the sector, it was being interpreted as loans to corporates.

According to a report of India Ratings, PSBs can further lower their lending rates by about 35 basis points, based on the savings rate cut.

Getting risk averse

• Incremental credit-deposit ratio has crossed 100, while the incremental investment-deposit ratio has been falling steadily
• The incremental credit-deposit ratio never crossed 100 since 2011
• The last time the investment-deposit ratio was in the negative territory was in April 2016
• Ratio of investment to deposits has remained steady at 30% for some time 
• Mandatory requirement of govt bond holding is 20%, but in the absence of a healthy credit demand, banks are maintaining excess bond holding
• Banks are getting risk-averse and resorting to lazy banking