Liability management now top priority for lenders: Private bank CEOs

At a time when demand for loans far outstrips growth in deposits, banks must adopt much more aggressive strategies when it comes to handling their liabilities, top officials of several private lenders said at the Business Standard BFSI Insight Summit on Wednesday.

“There is a clear scramble for liabilities. As a wise man once said, everything starts with liabilities. Without that, you can’t think of all this big asset growth. It looks like the runway for credit growth is long and if deposit growth does not catch up, at some stage the credit growth will be impacted,” said Amitabh Chaudhry, managing director and chief executive officer of Axis Bank.

“At some stage, yes, some of us have to work harder on deposits, yes, all of us are trying to sway our franchise bowl in terms of ensuring that we don’t have excess liquidity sitting in the wrong parts of the balance sheet,” he said.

Bank credit growth has remained above deposit growth for almost all of 2022, with latest RBI data showing that loan growth was at 17.5 per cent year-on-year while deposit growth was at 9.9 per cent as on December 2. Over the past few months, banks have raised deposit rates sharply in order to finance the loan growth. This could exert pressure on banks’ net interest margins and consequently profitability.

Private bankers said there were signs that the credit demand was durable and as such the landscape for banks’ management of assets and liabilities would remain challenging for quite some time.

“My sense is that the credit growth that we are experiencing is a bit structural. There’s a new borrower which is now found to be credit-worthy which we couldn’t find earlier, so there is an increase in the borrower base, both in the business side — SME and MSME — as well as the individual side,” said Hitendra Dave, India CEO of HSBC Bank.

“It’s not a one or two-year growth and, therefore, all bank managements, all ALCOs, etc. will need to spend a lot more time on liabilities. Assets are much more (well) behaved now, but liabilities, after many years, we’ll have to start fighting for and competing,” he said.

Amid the multi-year gap between credit offtake and deposit growth, banks would likely approach capital markets more and more to bridge the gap, the executives said. Over the past few months, banks have stepped up issuances of various kinds of bonds in order to raise tier-1 and tier-2 capital.

The higher interest rate regime could, however, benefit banks by leading to shifts of funds from other channels to the banking system.

“On the liabilities side, once the interest rates have been rising, then the deposits of the banking system will automatically grow. Alternative sources of credit, let’s say people are keeping money in liquid mutual funds, now they’ll move to a bank. Raising money through bonds and borrowing will happen for sure,” said V Vaidyanathan, MD & CEO, IDFC First Bank.

Some of the bankers were of the view that the extremely comfortable liquidity conditions that had prevailed prior to this year had enabled some lenders to optimise their core operations.

“From my bank’s point of view, earlier over the past three-four years, we were not lending much, we were only doing retail. So, that way, liquidity was very comfortable,” said Rakesh Sharma, MD & CEO of IDBI Bank.

“Now, with better management of liquidity, we are able to optimise on all fronts. So, liquidity and capital, both, are quite okay and we have been able to manage our asset-liability even better,” he said.

According to Citi India CEO Ashu Khullar, obtaining liabilities at a low cost was tantamount to the ‘Holy Grail’ for banks.  

“I think the way we should also look at deposits is that if you can get it by servicing the customer’s needs as a part of the normal cash management and add value, then you’ll get liabilities at a much lower cost. That’s the Holy Grail. That’s a lot of focus for us — to invest in technologies to do that,” Khullar said.

The executives were of the view that the increased competition from various new entities in the financial sector was a healthy phenomenon, which would ultimately push all stakeholders to consistently improve their product offerings.