Tag: Government Security

Bank loans do not reflect credit risk adequately as RBI chases growth, BFSI News, ET BFSI

Banking & Finance

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The period of extended surplus liquidity is already witnessing fierce pricing wars across banks, some of which may not reflect credit risk adequately.

“However there is the risk of an Asset Liability mismatch if the liquidity is withdrawn quickly. As of now, the inflation numbers may not warrant such a decision from RBI, but if core inflation persists in the current range of 6% or above, that might act as a hindrance to continued liquidity abundance,” according to the State Bank of India’s economic research report Ecowrap.

The industry is replacing its long-term debts by very low-priced CP/working capital demand loan (ECDL) and this will obviously act as an enabler once the investment cycle revives

Margin pressure

Banks are now facing significant margin pressures despite surfeit of liquidity in the banking system, it said.

A back of envelope estimate suggests that the core funding cost of the banking system that includes cost of deposits, negative carry on Statutory Liquidity Ration (SLR) and Cash Reserve Ratio (CRR) and Return on Assets is currently at 6 per cent, while the reverse repo rate is at 3.35 per cent. Additionally, if the cost of provisions is added to the core funding cost, the total cost comes to around 12 per cent, the report said.

Credit risk

The report cited the example of 15 years loans, which are being priced at even lower than 6 per cent, linking with repo / treasury bill rates. It said that 10-year Government Security (G-Sec) is currently trading at 6.2 per cent and by the current pricing trends this could even gravitate towards 6 per cent again.

This anomaly not only negates the concept of tenor premium but may create a material risk with regard to sustainability of such rates in long term, on which borrowers and banks are basing their financial calculations, it said, adding that the only good thing is that such pricing war is mostly restricted to AAA borrowers.

According to the report, three year term loans are being quoted at close to 4 per cent repo rate and seven year term loans for borrowers below AAA are also quoting a risk premium of 15-20 basis points over the 10 year rates. Working Capital Loans (WCL) are currently being quoted at a notch above reverse repo rate at 3.35 per cent.

The report said that the concept of normally permitted lending limit (NPLL) for specified borrowers, meant to nudge them to move towards corporate bonds market, may lose its importance.

CP market

Ghosh observed that the commercial paper (CP) market is also witnessing significant churn with banks now almost absent.

Non-Banking participants like mutual funds who do not have access to RBI Reverse Repo window are creating pricing pressure in CP market as they are sometimes quoting below RBI reverse repo rate.

The CP market reflects the huge pricing gap between better and lower rated borrowers, it said.



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Lending, G-Sec rates not moving in tandem: CARE Ratings

Banking & Finance

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The movement of commercial lending and Government Security (G-Sec) rates are not in sync, according to CARE Ratings.

The credit rating agency, in a report, said the weighted average lending rate (WALR) on fresh loans declined from 9.26 per cent in February 2020 to 8.82 per cent in March 2020 to 8.14 per cent in January 2021.

However, the 10-year G-Sec yields, which ranged between 5.8-6 per cent in the second part of the year (July-December 2020), climbed to the 6.20 per cent after the Budget and monetary policy were announced in early February 2021, it added.

“There is surplus liquidity in the system as banks are parking large amounts in reverse repo auctions.

“Growth in credit is lagging that of deposits and yet there is a tendency for G-Sec yields to increase notwithstanding aggressive measures by the Reserve Bank of India to keep them down,” said the report.

At the same time, banks are lowering their lending rates to garner business, especially on the retail side. Hence, the movement of commercial lending rates and G-Secs are not in consonance, said the agency.

Banks’ mobilise 85% more deposits

Bank deposits have increased by ₹12.13-lakh crore between March-end 2020 and February 12, 2021. This is almost 85 per cent more than that of last year when they increased by ₹6.52-lakh crore, CARE said.

As far as banks are concerned, they get to keep a larger part of these deposits as the cash reserve ratio (CRR) was lowered this year from 4 per cent to 3 per cent, it added.

Bank credit has grown by ₹3.33-lakh crore during the period March-end 2020 to February 12, 2021, compared to ₹2.71-lakh crore last year.

Admittedly, there can be considerable increase during the last fortnight of the financial year in March when the year-end impact pushes up credit as banks seek to meet their targets, emphasised the report.

The net result of the surplus liquidity could be seen in the relentless parking of funds in the overnight reverse repo window, which ranged between ₹4-lakh crore and ₹7-lakh crore on daily basis, with the amount crossing ₹8-lakh crore in May 2020 on a couple of occasions.

“It may be expected that the RBI will continue to support the system as stated in the last policy. However, markets will still be influenced by inflation as well as the government borrowing programme which will start from April for the next financial year,” the agency said.

CARE expects demand for private investment to also increase as the economy is expected to grow by 10-10.5 per cent in FY22 which will require support from banks.

It observed that the surplus liquidity seen throughout FY21 may no longer be available in the same quantum.

The agency expects the 10-year G-Sec yields to remain stable in the 6.20-6.30 per cent range in FY22 in the absence of a repo rate cut. The upward tendency of inflation may come in the way of the Monetary Policy Committee’s decision to lower the same, it added.

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