As credit growth in the system accelerated, deposit growth did not keep pace with credit growth, causing the gap to widen to a more than three-year high. thus exacerbating fears that the slow growth of deposits could become one of the biggest constraints. for loan growth in the system.
According to the latest data from the Reserve Bank of India (RBI), credit growth in the system for the fortnight ended June 17 was 13.2% and deposit growth was 8.3%, a gap of 490 basis points.
“…our biggest concern is that the gap between deposit growth and loan growth is widening to its highest level in three years. We believe deposit growth will be the biggest constraint to growth loans for the system,” said Suresh Ganapathy and Param Subramanian of Macquarie Research.
Credit drawdown in the system has been quite robust in recent months due to several factors, including better use of working capital limits by businesses; robust growth in housing and consumer loans; and companies taking the banking route to finance their projects instead of short-term paper due to the tightening of rates there.
According to the latest data on the sectoral deployment of credit, credit to individuals increased by 16.4%; credit to the service sector increased by 12.9%; the agricultural portfolio grew by 11.8%; and the industrial sector recorded growth of 8.7%.
Anil Gupta, Vice President of Financial Sector Rating, ICRA, said: “While deposits grew by 8.3%, net of cash reserve ratio (CRR) and statutory liquidity ratio (SLR) , loanable deposits from additional deposits from banks are even smaller The widening gap between credit and deposit growth indicates that excess liquidity in the system is shrinking and we may eventually see liquidity conditions stricter in the future.
Excess liquidity in the banking system fell significantly from 4.57 trillion rupees at the end of April to 3.5 trillion rupees at the beginning of July.
“Additionally, certificates of deposits have seen growth, which is also increasing deposit growth. Without the growth of certificates of deposits, deposit growth would be less than 8%,” he added.
Weak deposit growth could force banks to raise rates.
“As liquidity decreases in the system, we could see upward pressure on banks’ liabilities to fund the drawdown of credit in the system,” Prakash Agarwal, Director and Head (Financial Institutions), India Ratings.
“Thus, banks may have to compete with each other to mobilize deposits by raising deposit rates. The downside is that banks could see their margins shrink, given that a large portion of the loan book is tied to external benchmarks. However, at this stage, the credit – deposit is moderate. If the problem persists, we could also see an impact on banks’ ALM,” Agarwal said.
While the six-member Monetary Policy Committee (MPC) has raised the benchmark policy rate, the repo rate, by 90 basis points since May, prompting banks to raise interest rates. ‘interest on their external loans linked to the reference in the same proportion, the increase in deposit rates has not been proportional to the increase in lending rates.
During the last monetary policy meeting, Governor Shaktikanta Das had indicated that the deposit rate would increase. “Normally, the transmission takes time. We just announced the rate hike a month ago. It will take about two to three months for transmission. We expect rate increases to be passed on to liabilities, viz. deposits. Bank deposit rates are rising. In any case, when there is credit drawdown, banks must mobilize more resources by offering higher deposit rates to savers,” he said.