As credit demand in the system remains strong, Indian banks are aggressively raising funds through bonds to fund liquidity gap. In the first three quarters of the current fiscal year, the gross bond issuances of banks reached an all-time high of ₹91,500 crore, surpassing the previous high of ₹80,000 crore in FY17, ICRA said in a note on Monday, adding that they are likely to close the financial year at around ₹1.4 lakh crore.
While credit demand is increasing across all segments, deposit growth has lagged. This has resulted in a widening credit-deposit gap.
Incremental credit expansion stood at ₹12.7 lakh crore, while deposit accretion continued to trail at ₹8.9 lakh crore, till December 16, 2022.
To bridge this gap, banks have been relying on various sources of funding such as refinance from financial institutions, the drawdown of excess on-balance sheet liquidity and debt capital market issuances, said Aashay Choksey, vice-president & sector head, financial sector ratings at ICRA.
He expects the system-wide credit-to-deposit ratio to firm up to 76.3-76.5 percent by March from 74.8 percent as of December16, 2022, and stand considerably higher than the low of 69.6 percent seen during the pandemic.
Tier I & II bonds qualify for inclusion in capital ratios besides shoring up growth capital for lenders and boost their liquidity coverage ratios and the net stable funding ratios. Banks also issue long-term infrastructure bonds to fund certain specified eligible assets.
Both public and private banks issued infrastructure bonds. Public banks had a higher preference for tier-I bonds while private banks issued more of tier-II bonds.
Within overall bond issuances of ₹91,500 crore in the first three-quarters of FY23, tier-II issuance reached an all-time high of ₹47,200 crore.
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