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Banks selling bond holding to meet credit demand

August 03, 2022

Banks selling bond holding to meet credit demand
Rising demand for credit has led Indian banks to dip into their bond investments, probably squeezing liquidity additional and inflicting borrowing prices to harden, as incremental loan disbursements exceed the tempo at which savers are constructing deposits with high-street lenders.

Banks’ incremental credit to deposit ratio, or the proportion of recent deposits that banks use for recent lending, has gone previous the 100% mark. That signifies that banks are liquidating their funding portfolio to meet credit demand, placing additional stress on system liquidity.

To be certain, banks are required by statutes to put aside part of these funds to make sure the monetary system is sufficiently de-risked. To preserve that threshold at mixture ranges and meet the authorized mandate, banks are liquidating bond investments within the absence of ample deposit creation.

Bank credit accelerated at one of many quickest paces because the pandemic at 14%, and the incremental credit deposit ratio is at 113% as of July 15 and has hovered across the 100% mark since May this 12 months, latest Reserve Bank of India (RBI) information point out. This signifies that curiosity rates are set to rise additional.

“When there is credit offtake, there will be draining out of liquidity and there is always leakage of liquidity through an increase in currency in circulation,” RBI Governor Shaktikanta Das mentioned in a banking seminar final fortnight. “We are also increasing our policy rates. So, going forward, the banks have already started adjusting their asset prices.”

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