The banks could also be compelled to compete more durable to spice up deposits amid tightening liquidity and rising credit score demand forward of the festive season, analysts warned.
The banking system liquidity slipped into deficit for the primary time in practically 40 months earlier this week, prompting the Reserve Bank of India to infuse funds into the system.
“We think the real challenge is the gap between deposit growth and loan growth, as deposit growth is weak, at 9.5% YoY – a good 600 bps below loan growth,” mentioned Suresh Ganapathy, head of financials analysis at Macquarie.
“Over the next few weeks, as the festive season gathers steam, liquidity will tighten further. Also, people tend to hold a lot of cash during the festive season, and that tends to worsen the liquidity situation,” Ganapathy mentioned.
Bank loans rose 15.5% within the two weeks to Aug. 26 from a 12 months earlier, whereas deposits rose 9.5%, RBI information earlier this month confirmed.
With extra liquidity within the banking system during the last couple of years on account of the money infused by the RBI in the course of the pandemic, banks selected to depend on elevating funds from cash markets to help the prevailing demand for credit score.
But with credit score development at multi-year highs and the RBI focussing on draining liquidity to curb inflation, the cheaper funding avenues are drying up.
India credit score development surges, deposits lag sharply https://graphics.reuters.com/INDIA-BANKS/DEPOSITS/zjpqkrxeopx/chart.png
“Banks have been laggards in raising deposit rates due to excess liquidity in the system but lending rates were raised instantaneously,” mentioned Rupa Rege Nitsure, chief economist at L&T Financial Holdings.
“This has to change and if not, RBI will come down heavily on banks. The excessive reliance on bulk deposits is bad for overall financial stability of the economy,” she added.
Bankers agree that counting on the debt market to boost funds to help development will not be sustainable.
“Borrowing from the market to fund credit growth is just one of the ways and after a while it isn’t sustainable. So we will have to start raising rates more aggressively in the coming months,” mentioned a senior govt at a state-owned financial institution.
The common quantity of CDs raised by banks in a month rose sharply to 400 billion rupees in first quarter of FY23 in contrast with 260 billion rupees within the previous quarter, in line with a report by India Ratings.
Other bankers concurred.
Rates for bulk deposits, or deposits of over 20 million rupees, are rising extra quickly than retail, highlighting banks’ deal with elevating extra funds faster.
State Bank of India’s 1 to 2-year retail time period deposit price has gone up by 15 foundation factors in August to five.45%, whereas the financial institution raised the majority deposit price for a similar tenor by 75 bps to six%.
“Credit growth typically picks up in the second half of the year and with the festival season and economy picking up we expect a strong demand, so deposit mobilisation will increase,” mentioned one other banker.
Analysts consider that because the scramble for deposit intensifies, banks might really feel some influence on their margins within the coming quarters.
The incremental credit score deposit ratio has already crossed 100%, suggesting that banks have began lending greater than the whole deposits they maintain.
Incremental Credit-Deposit Ratio of Indian Banks https://graphics.reuters.com/INDIA-BANKS/DEPOSITS/egpbkrzmovq/chart.png
“In the next couple of quarters there may be some impact that lenders will feel on margin as the gap between lending and deposit rate narrows but it will be a short-term impact as banks will be able to pass on the cost to the borrowers,” mentioned Karthik Srinivasan, analyst at ICRA.
(Reporting by Swati Bhat and Nupur Anand in Mumbai; Editing by Saumyadeb Chakrabarty)