Credit growth endangered in India as gold lures deposits


By Anto Anthony
Bloomberg News
Tuesday, March 18, 2013

MUMBAI -- Indian banks are struggling to attract deposits to fund credit growth amid the slowest economic growth in a decade as customers buy assets such as gold and real estate to protect themselves against inflation.

The credit-to-deposit ratio at lenders led by State Bank of India widened at the end of last month to almost 79 percent, or the highest since the central bank began reporting the data in 1998. Meanwhile, physical savings including gold imports, which slumped to 45 percent of household assets in the 1990s, may end this month at about 66 percent, Vishal Narnolia, a Mumbai-based analyst at SMC Global Securities Ltd. (GLBS), estimated.

The accelerating flow of funds into gold -- spurred by households seeking to curtail erosion in the value of their savings -- may hinder policy makers’ efforts to bolster growth in Asia’s third-largest economy. New deposits aren’t keeping pace with lending, especially at private-sector banks such as ICICI Bank Ltd. (ICICIBC), according to central bank data, signaling that credit growth may halt.

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The accelerating flow of funds into gold -- spurred by households seeking to curtail erosion in the value of their savings -- may hinder policy makers' efforts to bolster growth in Asia's third-largest economy. New deposits aren't keeping pace with lending, especially at private-sector banks such as ICICI Bank Ltd., according to central bank data, signaling that credit growth may halt.

"The widening gulf between loan and deposit growth could emerge as a big threat over the next 12 months," Narnolia said by telephone yesterday. "Banks won't be able to maintain loan growth at these rates without bulk borrowing, and it will be a drag on margins and profits."

Products such as inflation-indexed deposits and bonds can help stem the exodus, Rana Kapoor, managing director of Yes Bank Ltd., said in an interview.

India will sell as much as 200 billion rupees ($3.7 billion) of inflation-indexed bonds for the first time, Economic Affairs Secretary Arvind Mayaram said yesterday.

Finance Minister Palaniappan Chidambaram has tripled import taxes in the past year to curb demand for gold in the world's biggest customer that fueled India's current account shortfall. Jewelery made from the metal is also used by Indian parents as gifts for newlyweds.

Outstanding loans at State Bank, the nation's largest, climbed 16 percent to 10.1 trillion rupees ($186 billion) by the end of 2012, while deposits rose 15.6 percent to 11.6 trillion rupees, according to the company’s filings.

"The rise in the credit-to-deposit ratio can be addressed only through structural changes," said State Bank Chief Financial Officer Diwakar Gupta. "Until inflation comes under control, people will find gold and real estate to be better investment avenues."

The lender pays 4 percent for deposits in savings accounts and 8.75 percent annually on three-year deposits.

ICICI Bank's shares have dropped 8 percent this year, making it the worst-performing stock in the Bloomberg Asia Pacific Banks Index after China Merchants Bank Co. The Indian bank's shares fell 1.5 percent to 1,051.40 rupees in Mumbai yesterday. State Bank dropped 0.5 percent to 2,249.80 rupees.

Inflation in India has averaged almost 9 percent in the three years through 2012, prompting the central bank to raise interest rates 13 times as government spending fueled price gains. Consumer prices are rising almost 11 percent, or at a record pace, and inflation continues to be "a worry," Finance Minister Chidambaram said in a March 15 interview.

Investments in gold, on the other hand, generated returns of as much as 85 percent in India in the three years to Dec. 31, data compiled by Bloomberg show. The central bank's house price index has increased 77 percent in the three years to March 31, according to Reserve Bank of India data.

"The real returns from bank deposits have been negative for a few years, forcing Indians to look for other inflation-hedged investments," said Ananda Bhoumik, a senior director at the Indian unit of Fitch Ratings Ltd.

Indians have stashed 18,000 tons of gold in jewelry, coins, and other forms, according to the website of Manappuram Finance Ltd., which extends loans secured by gold.

Such a hoard would be worth about $923 billion at current international prices, compared with India's $1.35 trillion banking system. ICICI Bank estimates the nation's households hold $1.1 trillion of gold.

Reserve Bank of India rules stipulating that lenders have to invest 23 percent of total deposits in government bonds already curtail the amount of funds available for credit growth. Rising purchases of gold by people seeking to hedge against the highest inflation rate among emerging economies, or to evade taxes, is adding to the stress on banks.

ICICI, the nation's largest private-sector lender, offers 4 percent on plain-vanilla savings accounts and 8.75 percent a year on fixed deposits for three years. Credit expanded 16 percent to 2.87 trillion rupees by the end of 2012 at the Mumbai-based lender, while deposits grew 9.9 percent to 2.86 trillion rupees, according to its filings.

The RBI cut some of its statutory requirements, injecting liquidity into the system, according to an e-mailed response from ICICI Bank. The lender said it also raised funds by selling long-term bonds in the domestic market in the quarter ended Dec. 31, reducing the need for additional deposits.

"An asset-liability mismatch stemming from mobilization of low-duration deposits on one hand, and a growing duration of assets on the other, could emerge as the biggest threat for Indian banks," A.S.V. Krishnan, a Mumbai-based banking analyst at Ambit Capital Ltd., said by phone.

The Reserve Bank of India has predicted that the economy will expand 5.5 percent in the year ending March 31, which would be the smallest gain since 2003.

"Loan growth will have to decelerate further if the credit-to-deposit ratio rises from these levels," Yes Bank's Kapoor said in a telephone interview on March 15.
Inflation Conundrum

Yes Bank, formerly backed by Rabobank Groep NV, pays depositors 7 percent on savings accounts, the highest in India, Kapoor said. State Bank of India raised one- and two-year payments by 25 basis points to 8.75 percent on March 1 even as the central bank cut its policy rate on Jan. 29 for the first time since April.

Still, India remains a "net saver" with savings at more than 30 percent of gross domestic product, said Saswata Guha, a Mumbai-based director at Fitch Ratings Ltd.

The value of gold jewelry purchased by Indians rose 37 percent to $8.5 billion in the quarter ended Dec. 31 from a year earlier, the latest data from the World Gold Council shows. The global spot price rose for a 12th year, by 7.1 percent to an average $1,668.75 an ounce, data compiled by Bloomberg show.

"The amount of gold imports into the country and growth in gold loans suggest that a significant portion of financial savings is going into gold," Fitch's Guha said on March 15. Investors don't need to panic because "once this conundrum of inflation is resolved, deposits will flow back to banks."

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