Term funds can ease banks' funding strains, boost liquidity: India Ratings

Raising long-term liabilities can reduce funding gap of banks

Widening mismatches in banks' funding will continue to put pressure on systemic liquidity and keep interest rates elevated, said India Ratings.

It has also suggested raising long-term liabilities can help reduce this gap.

"Raising long-term liabilities can help reduce the funding gap of banks and can provide a sustained remedy to them, particularly as loan tenures may not reduce in the short-to- medium term," India Ratings Senior Director for banking & financial institutions Ananda Bhoumik said in a report.

He further said banks can also go for refinancing from nodal agencies and debt capital instruments to raise long-term senior bonds to the extent of their infrastructure funding.

Large banks enjoy easy access to long-term investors such as insurance and pension funds, he said.

If such funding routes are not availed of by bank, he warned that "the growing refinancing pressure will ultimately get reflected in the current inverted-to-flat yield curves, which, together with sticky inflation, discourages long-term savings and may dilute transmission of monetary easing, thus keeping interest rates elevated".

Notably, without a properly developed corporate bond market, banks are the main source of funds for long gestation infra projects, creating severe strain on banks' asset liability issues.

Further compouding the issue is the flight of money to other sectors like mutual funds and highly paying NBFCs, forcing banks to pay high interest rates on deposits.

Finding it difficult to mop up deposits, a worried SBI Chairman Pratip Choudhury had recently said that at least Rs 15,000 crore are flowing out of his branches every month into MFs and other financial sectors.

According to the latest RBI report, deposit growth has hit a nine-year low during the fortnight ended December 28, 2012, with a growth of just 11% year-on-year.

The last time deposit growth dipped below 13% was in December 2003. In the beginning of this fiscal, the RBI had projected a deposit growth of 15%.

Outstanding deposits of banks stood at Rs 64,77,246 crore as on December 28, a growth of just 6% for the first nine months of FY13.

Against this, credit growth in the first nine months of this fiscal was a tad better at 7.1 percent, but in the year-ago period it was 10.5%.

Bankers blame the dip in deposits over the last two years to high inflation, prompting investors to save through other products, primarily gold and real estate, apart from switching to other financial products.

Public sector banks have also been hit hard by a government diktat that caps bulk deposits and certificates of deposits at just 15% of total deposits.