Analysts warn that banks may be forced to put up a tough competition to boost deposits amid cash crunch and rising credit demand ahead of the festive season.
Earlier this week the banking system ran into liquidity deficit for the first time in nearly 40 months, prompting the Reserve Bank of India to infuse funds into the system.
“We think the real challenge is the gap between deposit growth and credit growth, as deposit growth is weak, at 9.5% year-on-year – 600 bps down from credit growth,” said Suresh Ganapathy, head of financial research at Macquarie.
Ganpati said, “In the next few weeks, as the festive season picks up, the liquidity will strengthen even more. Moreover, people keep a lot of cash during the festive season, and this worsens the liquidity position. “
RBI data earlier this month showed bank loans rose 15.5% in the two weeks from a year ago to August 26, while deposits grew 9.5%.
With excess liquidity in the banking system in the past few years, due to the cash being pumped out by the RBI during the pandemic, banks chose to rely on raising funds from money markets to support the current demand for credit.
But with credit growth at a multi-year high and the RBI focused on slashing liquidity to curb inflation, avenues for cheap funding are drying up.
India’s credit growth rises, deposits lag sharply
“Banks have lagged behind in raising deposit rates due to excess liquidity in the system, but lending rates have been raised immediately,” said Rupa Rege Nitsure, chief economist at L&T Financial Holdings.
“This has to change and if not, the RBI will fall heavily on banks. Excessive reliance on bulk deposits is bad for the overall financial stability of the economy,” he said.
Bankers agree that relying on the debt market to raise funds to support growth may not be sustainable.
A senior executive of a state-run company said, “Obtaining debt from the market is only one way for credit growth and it is not sustainable after some time. Bank.
According to a report by India Ratings, the average amount of CDs raised by banks in a month rose sharply to Rs 400 billion in the first quarter of FY13 from Rs 260 billion in the previous quarter.
Other bankers agreed.
Rates for bulk deposits, or deposits above Rs 20 million, are rising more rapidly than retail, with banks increasingly focused on raising more funds.
State Bank of India’s 1- to 2-year retail fixed deposit rate has increased 15 basis points to 5.45% in August, while the bank has increased the wholesale deposit rate by 75 bps to 6% for the same period.
“Generally, credit growth picks up in the second half of the year and with the festive season and the economy picking up, we expect strong demand, hence deposits will pick up,” said another banker.
Analysts believe that as the scramble for deposits intensifies, banks may feel some impact on their margins in the coming quarters.
The incremental credit deposit ratio has already crossed 100%, indicating that banks have started lending more than their total deposits.
Incremental Credit-Deposit Ratio of Indian Banks https://graphics.reuters.com/INDIA-BANKS/DEPOSITS/egpbkrzmovq/chart.png
“There may be some impact over the next few quarters that lenders will feel on margins as the gap between lending and deposit rates has narrowed, but this will be a short-term impact as banks will be able to pass on the cost to borrowers,” ICRA analyst Karthik Srinivasan said.
(Reporting by Swati Bhat and Nupur Anand in Mumbai; Editing by Soumyadev Chakraborty)