Banks selling bonds to meet loan demand

Banks have been forced to liquidate their bond investments to meet the high credit demand seen after a long period. Because not enough new deposits are being created in the system. Analysts are expressing the possibility that the sale of bonds by banks could further reduce liquidity and make borrowing costs more expensive. Incremental credit […]
 


Banks selling bonds to meet loan demand

Banks have been forced to liquidate their bond investments to meet the high credit demand seen after a long period. Because not enough new deposits are being created in the system. Analysts are expressing the possibility that the sale of bonds by banks could further reduce liquidity and make borrowing costs more expensive. Incremental credit growth has been at an all-time high over the past few months. Whereas new deposits are not being made against it as expected. Due to this, there has been a huge jump in the CD ratio of banks. Banks are selling their investment portfolios to meet the credit demand of customers.

 

Which is actually creating more pressure on the liquidity in the system. According to experts, due to lack of adequate deposit creation, banking companies are having to set aside some part of the sale of bonds to comply with the RBI guidelines. It ensures that the financial system is sufficiently risk free. Some banks are selling bonds only to meet these statutory requirements.

 

During the first two weeks of July, bank loan demand saw the fastest growth rate since the pandemic at 15 per cent. After which the incremental credit deposit ratio reached 113 per cent on July 15. The latest RBI data shows that the ratio has been hovering around 100 per cent since last May. They are indicating further increase in interest rates in the coming times. The RBI governor had also said in a recent seminar that whenever the offtake of loans is high, the liquidity goes down.

 

RBI is increasing the policy rates and hence the banking companies are also having to increase the rates (interest rates) on their assets. Many banks have increased their lending rates in the last two months. On the liability side, they have also started increasing the deposit rates. According to RBI data, banks hiked term deposit rates by an average of 4 basis points in May and 6 basis points in June, following a 90 basis point hike in the policy repo rate. Das said it will take some time for deposit rates to rise significantly. However, banks have no option but to do so.