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Banks' funding constraints have eased significantly following USD 136 billion in inflows through FCNR, external commercial borrowings (ECB) and overseas foreign currency bonds (OFCB), which have improved deposit availability and lowered funding costs, according to a report by Kotak Institutional Equities.
The brokerage expects the influx of deposits to put 10-30 basis points of near-term pressure on banks' net interest margins (NIMs) as the funds take time to be deployed into loans or used to repay higher-cost borrowings. At the same time, Kotak said the deposits provide banks with greater flexibility in managing their funding. These are high-quality liabilities that are SLR, CRR, LCR and PSL efficient, making them valuable for banks, the report said. Over the medium term, the additional funding could support faster growth in net interest income, with benefits expected from a better asset mix and lower cost of funds. The industry has mobilised USD 127 billion through FCNR(B) deposits, equivalent to around 5 per cent of deposits, and another USD 9 billion through OFCB and ECB instruments, the report said. As of August 14, system loan growth stood at 18 per cent year-on-year, compared with 15 per cent deposit growth, while the credit-deposit ratio had declined by around 200 basis points from its recent peak to 82 per cent. Kotak said a further USD 75 billion of inflows had been witnessed in the following fortnight and expects the ratio to moderate further as deposit growth converges with loan growth. The brokerage said banks have three broad options for deploying the additional liquidity accelerating loan growth, temporarily investing surplus funds in short-duration instruments, or retiring higher-cost borrowings. It expects full deployment into loans to offer the highest earnings benefit, although the gains are likely to emerge gradually. Kotak cautioned that current loan growth may partly reflect temporary factors and expects underlying credit demand to moderate as exceptional liquidity flows fade. The report also sees scope for funding costs to decline as banks use the additional deposits to replace expensive borrowings. Certificate of deposit prices have already cooled by 60-70 basis points in September, according to Kotak's data. Kotak believes the pressure on margins could ease after banks absorb the impact of FCNR deposits over the next two quarters. We believe that the NIM may have found its bottom for the industry, the brokerage said, while noting that loan growth is likely to slow as wholesale demand tapers. (ANI)
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