Banks Brace for Unprecedented Bond Issuances as Deposit Growth Lags

The Indian banking sector is set to witness a surge in bond issuances, with public sector banks leading the charge. A recent report by domestic rating agency Icra suggests that the slower deposit growth will compel banks to raise up to Rs 1.3 lakh crore through bond issuances in the fiscal year 2025, marking the highest ever for the system.

Navigating the Widening Gap: Banks Seek Alternative Funding Avenues

Tightening Liquidity and Credit Growth Outpacing Deposits

The report highlights that the continuing wedge between deposit and credit growth has necessitated banks to seek alternative funding sources. With credit growth consistently outpacing deposit growth, banks are facing tight liquidity conditions, forcing them to explore bond issuances as a means to bridge the gap.In the previous fiscal year, banks had raised Rs 1 lakh crore through bond issuances, while the record high was reached in FY23 at Rs 1.1 lakh crore. The current fiscal year has seen a significant increase, with banks already raising Rs 76,700 crore from bonds, a growth of over 225% compared to the same period in FY24.

Public Sector Banks Lead the Charge

The report indicates that nearly 85% of the bond issuances will be undertaken by public sector banks. This trend is driven by the higher appetite for infrastructure bonds among these lenders, as they continue to pursue growth through this avenue.In contrast, private banks are focusing on reducing their credit-to-deposit ratio, making them less reliant on bond issuances for funding. The report suggests that raising money from bonds will optically worsen the credit-to-deposit ratio for private sector banks, while public sector banks will maintain their focus on infrastructure bond issuances, given the ample headroom available.

Infrastructure Bonds: A Lifeline for Public Sector Banks

The report highlights that banks' advances to the infrastructure sector are estimated to reach Rs 13-14 lakh crore as of June 30, 2024, with public sector banks holding a dominant share of around 75%.The surge in infrastructure bond issuances can be attributed to the government's focus on infrastructure spending, the availability of a sizable infrastructure loan book that is eligible for funding through this instrument, and the strong demand from insurance companies and provident funds for long-term issuances.

Navigating the Challenges: Banks Adapt to Evolving Funding Landscape

The report suggests that the higher bond issuances will help banks maintain their credit growth momentum, even as deposit growth lags behind. However, the reliance on bond funding may have implications for banks' balance sheets and profitability, as they navigate the changing funding landscape.As banks grapple with the widening gap between deposit and credit growth, their ability to adapt and diversify their funding sources will be crucial in ensuring the continued stability and growth of the Indian banking sector.