Kotak Mahindra sees a saviour coming to India's deposit-hit bankers' rescue this June

The inclusion of India's sovereign bonds to JPMorgan Chase & Co.’s global indexes from June could improve banks’ liquidity and reduce the need to aggressively pursue deposits in the short term, Kotak Mahindra Bank has said. 

Liquidating excess holdings can provide a solution for meeting lending growth without a commensurate increase in deposits in the short run, Joint Managing Director K.V.S Manian told Bloomberg in an interview. 

The entry of overseas funds into India’s $1.2 trillion government debt market presents an opportunity for lenders including Kotak to sell part of their bond investments to new buyers, he added. 

The move will ease pressure on banks that have been relying on costly deposits to disburse loans. Kotak holds securities well in excess of the minimum statutory liquidity ratio mandated by the Reserve Bank of India. 

Banks in India are the largest holders of government bonds.

Kotak’s daily average liquidity coverage ratio for the December quarter was 126.85%, higher than the regulatory threshold of 100%, according to its latest financial disclosures.

With deposit growth of banks being slower than their credit growth, the credit-deposit ratio – which tells us how much money banks are lending compared to what they have in deposits – is at its highest in 10 years, hovering around 80%, a surge of 38 basis points compared to the preceding fortnight, according to CareEdge Ratings report. 

A high CD ratio indicates liquidity and credit risks for banks.

But why the slow growth in deposits? 

Well, banks are facing stiff competition not just from each other but also from mutual funds and also from physical assets such as gold and real estate market.  Uday Kotak recently told Business Today that he believes that India is transitioning from a nation of savers to investors, posing a long-term challenge for the banking sector, which relies on Current Account and Savings Account (CASA) deposits as its primary funding resource.