Indian banks seek alternative investments as credit offtake slows

Indian banks are expected to increase investment in short-term paper or government bonds after seeing deposits sharply outpace loan growth in the second quarter.

Bankers are exploring these avenues to park funds ahead of an expected pick up in credit demand in the fiscal second half that begins October.

"The alternative will be placing the funds in either reverse repo or in liquid mutual fund or something like that. Increasing SLR holding is also a possibility," said Ravi Kumar, chief financial officer at Bank of India.

"For the future lines which are going to be availed, we need to have the deposits. It is a continuous process," said M. Narendra, chairman and managing director, Indian Overseas Bank. "Also, if the interest rates are going to be high for sometime, we should take deposits when rates are fairly moderate."

He expects inflation to remain high for at least another six months, which is likely to put pressure on the RBI to

Banks credit growth has been slower at 3.7 percent in the June quarter, compared with 5 percent in the year-ago period, prompting lenders to suggest to the central bank to pause its rate hike cycle.

However last year, demand for funds from telecom companies for third-generation spectrum and broadband wireless licence payments, pegged at about 1.06 trillion rupees, fuelled credit offtake.

"I don't think there has been any peculiar sectoral activity in the June quarter, like it happened in the year-ago quarter where telecom licenses were given and had to be taken up on loans," a senior official of a private bank who did not wish to be named said.

The official said banks might be wanting to protect their net interest margins by avoiding further rate hikes which may slow loan growth.

"High rates hurt banks. So when its hurting, the demeanour and presentation will be to mitigate the hurt and not accentuate it," he said.

Large private banks such as Axis Bank, Kotak Mahindra and HDFC Bank expect their loan books to grow at a faster pace than the industry average.