Analysts cautioned that Indian banks may need to exert greater competition to increase deposits due to tightened liquidity and increased credit demand before the holiday season.
This week, the Reserve Bank of India injected cash into the system after the Indian banking system liquidity fell into deficit for the first time in nearly 40 months.
According to Suresh Ganapathy, head of financials research at Macquarie, “we think the underlying difficulty is the gap between deposit growth and loan growth, as deposit growth is sluggish, at 9.5% YoY – a full 600 bps below loan growth.”
According to RBI data earlier this month, bank loans (INLOAN=ECI) increased by 15.5% over the previous year’s equivalent two weeks while deposits (INDEP=ECI) increased by 9.5%.
Banks decided to rely on raising money from the money markets to support the current demand for credit because the banking sector had excess liquidity during the previous couple of years as a result of the money the RBI injected during the pandemic.
However, the more affordable finance options are disappearing as a result of credit growth reaching multi-year highs and the RBI’s focus on reducing liquidity to control inflation.
Due to the surplus liquidity in the economy, banks have been slow to boost deposit rates, while lending rates have been raised immediately, according to Rupa Rege Nitsure, chief economist at L&T Financial Holdings.
“This must change, or the RBI will punish banks severely. The entire financial stability of the nation is negatively impacted by the overreliance on bulk deposits,” she added.
According to a survey by India Ratings, the amount of CDs raised by banks on average monthly increased significantly from 260 billion rupees to 400 billion rupees in the first quarter of FY23.
The focus of banks on generating more money more quickly is seen in the fact that rates on bulk deposits, or deposits of over 20 million rupees, are growing more quickly than retail rates.
The retail term deposit rate at State Bank of India for deposits between one and two years increased by 15 basis points in August to 5.45%, while the bulk deposit rate for the same tenor increased by 75 bps to 6%.
Banks may have begun lending more than their total amount of deposits now that the incremental credit deposit ratio has already surpassed 100%.
According to Karthik Srinivasan, analyst at ICRA, “in the next few of quarters there may be some impact that lenders would experience on margin as the gap between lending and deposit rate narrows,” but it will only have a short-term effect because banks will be able to pass the cost on to the borrowers.
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