Infra Bonds May Not Solve Liquidity Woes For Banks

The recent rise in infrastructure bond issuances by banks may provide some reprieve, but will not solve their liquidity issues, according to experts. Some experts are of the view that banks could continue issuing infrastructure bonds, as long as they have enough infrastructure and housing assets. However, this cannot keep on forever as long-term investors subscribing to these bonds have certain investment limits.

Another section of the industry says that liquidity is not a function of what banks can do, but it is entirely a function of what the RBI and the government do with system liquidity.

"Banks issue a certain amount of infra bonds every year. However, the amount of funding raised from infra bonds is much smaller compared to the size of deposit growth in a year," said Neeraj Gambhir, group executive – treasury, markets and wholesale banking products at Axis Bank Ltd.

To understand whether this will actually help deposit growth, lets take State Bank of India as an example. The largest lender in the country has issued two infrastructure bonds worth Rs 20,000 crore in financial year 2024, as against the total increase in its size of deposits to Rs 49.16 lakh crore.

Further, the share of infrastructure lending in the overall banking credit has also come down. Loans extended to infrastructure rose by 5.5% to Rs 13.23 lakh crore year-on-year in June, as against 7.2% YoY rise to Rs 13.37 lakh crore in May, the RBI's latest data on sectoral deployment of bank credit showed.

So far in the current financial year, public sector banks and private sector banks have raised Rs 38,811 crore through infrastructure bonds, against Rs 30,895 crore raised in the first half of fiscal 2024, according to data by Informist.

Several lenders such as Bank of Baroda and HDFC Bank Ltd. are said to have been in talks to tap the market with infrastructure bonds. Last week, NDTV Profit reported that Bank of Baroda plans to raise up to Rs 5,000 crore through a 10-year infra bond issue and has invited bids for this week.

As on Thursday, surplus liquidity in the banking system increased to Rs 1.07 lakh crore. While at the system level, it appears to be in surplus but liquidity conditions remain tight because of uneven distribution.

According to a report by CareEdge Ratings, banks' credit and deposit ratio was 80.6% as of June 30, expanding by 430 basis points on year. Credit deposit ratio is a measure of the headroom available for banks to grow their advances, considering the level of deposits in the system. A higher CD ratio implies lesser headroom.

In an exclusive interview to NDTV Profit last week, Reserve Bank of India Governor Shaktikanta Das had said that it is positive to see banks raising funds through infrastructure bonds.

"The gap between credit and deposit growth, if it becomes persistent, then it can create liquidity issues. It is alright if it happens for 6-8 months or even a year, but if it continues, banks have to be careful in proactively dealing with liquidity management," Das said.

However, he cautioned lenders that they have to carefully monitor the change in investment strategies of young aspirational Indians as the shift from deposits to other investment avenues is not an issue as of now, but in the future, it can lead to a structural liquidity issues.

As of Aug. 9, the scheduled commercial bank's non-food credit was Rs 168.53 lakh crore, up 13.5% on the year, according to RBI data. Deposits totaled Rs 213.3 lakh crore, up nearly 10.9% on a year on year basis. This deposit growth has dipped as compared to 13.5% on year in the same period in 2023. It was 8.8% and 10.6% in 2022 and 2021, respectively.

This fall in deposit growth and reliance on other sources has also lifted banks' cost of funds, in turn impacting their profitability.

"As term deposit rates are growing, we can see a shift within deposit ratio, wherein term deposits have seen a stronger growth compared to CASA. This has been one of the major concerns impacting cost of funds subsequently impacting NIMs," CareEdge Ratings said in its report.

This has come as the deposit mix has been undergoing a change from retail to wholesale. Retail investors have shifted toward other lucrative investment options such as equity.

With credit growth outpacing deposits, the banking system is struggling to increase the share of low cost liabilities, making them turn to wholesale sources, these experts said.

The net interest margins of scheduled commercial banks fell by 13 bps on year to 2.94% in April-June as the rising cost of deposits and slower CASA growth affected margins.

Going forward, CareEdge expects credit growth to trail deposit growth. Higher deposit competition will then lead to further straining of NIMs in upcoming quarters.

Banks and financial institutions raise funds through infrastructure bonds to finance their long-term infrastructure projects. These bonds have a minimum maturity of seven years and are eligible for some regulatory exemptions such as mandatory requirements of statutory liquidity ratio and cash reserve ratio. Affordable housing loans also qualify for lending against infrastructure bonds.

In his interview, Das had said that banks must bring balance in credit and deposit growth. He also asked banks to introduce new products and services in deposits, as well as use their vast branch networks to their advantage.