Liquidity tightening could force banks to compete harder for deposits


Bank loans rose by 15.5% in the two weeks to August 26, compared to a year earlier.


Banks may be forced to compete harder to boost deposits amid tighter liquidity and rising credit demand ahead of the holiday season, analysts warned.

The liquidity of the banking system plunged into deficit for the first time in nearly 40 months earlier this week, prompting the Reserve Bank of India to pump money 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 – over 600 basis points lower than loan growth,” said Suresh Ganapathy, head of financial research at Macquarie.

“In the coming weeks, as the holiday season picks up, liquidity will tighten further. Also, people tend to hold a lot of cash during the holiday season, and that usually worsens the liquidity situation,” Ganapathy said.

Bank loans rose 15.5% from a year earlier in the two weeks to Aug. 26, while deposits rose 9.5%, RBI data showed earlier this month.

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With excessive liquidity in the banking system in recent years due to the money brought in by the RBI during the pandemic, banks chose to rely on attracting money from the money markets to support the prevailing demand for credit.

But with credit growth at its multi-year high and the RBI focusing on draining liquidity to curb inflation, cheaper financing options are drying up.

India credit growth skyrockets, deposits lag strongly

“Banks have lagged in raising deposit rates because of the excessive liquidity in the system, but lending rates were raised immediately,” said Rupa Rege Nitsure, chief economist at L&T Financial Holdings.

“This has to change and if not, the RBI will come down hard on the banks. Excessive reliance on bulk deposits is bad for the overall financial stability of the economy,” she added.

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Bankers agree that relying on the debt market to raise funds to support growth is unsustainable.

“Borrowing from the market to fund credit growth is just one of the ways and after a while it’s unsustainable. So we’ll have to start raising interest rates more aggressively in the coming months,” said a senior executive of a state-owned company. Bank.

According to a report from India Ratings, the average number of CDs collected by banks in a month rose sharply to 400 billion rupees in the first quarter of FY23, compared to 260 billion rupees in the previous quarter.

Other bankers agreed.

Rates for bulk deposits, or deposits over 20 million rupees, are rising faster than retail, emphasizing banks’ focus on raising more funds faster.

The State Bank of India’s 1- to 2-year retail term deposit rate rose 15 basis points to 5.45% in August, while the bank increased its bulk deposit rate for the same maturity by 75 bps to 6%.

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“Credit growth tends to pick up in the second half of the year and as the festival season and the economy pick up, we expect strong demand, so deposit mobilization will increase,” said another banker.

Analysts believe that as the battle for deposits heats up, banks may feel some impact on their margins in the coming quarters.

The incremental credit deposit ratio has already surpassed 100%, indicating that banks have started lending more than the total deposits they hold.

Indian Banks Incremental Credit Deposit Ratio

“In the coming quarters, there may be some impact that lenders will feel on margin as the gap between lending and deposit rates narrows, but it will be a short-term effect as banks can pass the cost on to borrowers,” says Karthik Srinivasan. , analyst at ICRA.

(Reporting by Swati Bhat and Nupur Anand in Mumbai; editing by Saumyadeb Chakrabarty)



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