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Recently, a video on social media went viral as a bank official took to the street with megaphone to sign up customers as they seek for cash deposits to fund the fastest credit growth in a decade.
RBI rate hike cycle as it has been conscious in terms of frontloading rate hikes and calibrating excess liquidity in the system. The average net durable liquidity injected into banking system in April that was at ₹8.3 trillion is now ₹3 trillion.
RBI data showed that rising loan demand has pushed annual credit growth to a decade high of 17.95% as of October, compared to a five-year average of 9.7%.
Even as the banking system has moved closer to a calibrated liquidity coupled with higher signaling rates, one thing has still not changed is that credit risks are not getting adequately priced in, even as credit demand is at a decadal high and liquidity remains significantly downsized, argues Soumya Kanti Ghosh, the group chief economic adviser at the State Bank of India, in a report.
However, ASCBs deposits grew by 9.5% on YoY basis ( ₹7.4 lakh crore on incremental basis), compared to last year growth 9.9% ( ₹6 lakh crore), as per the fortnightly number as of 21st October 2022.
"Even though the incremental deposit growth is more by ₹1.4 lakh crore, looking at the credit demand Banks seem to be not happy with the number as Ye Dil Mange Mor. Some Banks have already started special schemes with higher card rates for specific tenors with rates up to 7.75% offered," the report said.
“Banks are currently mobilising certificate of deposits (CD) at rates as high has 7.97%, for a 360 days maturity paper. Further, few banks have raised CD at 7.15% for a 92 days maturity," SBI’s report said.
Outstanding CDs stood at ₹2.41 lakh crores as of October 21, 2022, as compared to just ₹0.57 lakh crore a year ago. The CP market is also witnessing significant churn with the primary issuances of the short term paper drastically reducing to ₹0.78 lakh crore after touching a high of around ₹2.9 lakh crore during Nov 2021. The yields have increased by 255 bps since April’2022 and is at 6.92% in Oct 2022.
It seems, with better rated corporates getting better deal directly from banks for their working capital needs, they have reduced their dependence to the short term paper.
It is also observed that corporates particularly in select sectors, have increased their cash holding in the half year ended September 2022 by up to 4 times as compared to September 2021.
The report also notes that the good thing is that such pricing war for both fund raising and lending is mostly restricted to AAA-rated borrowers and ultimately it should also lower the risk weighted assets thereby lowering the capital requirements.
To nudge large borrowers to move towards corporate bonds market, the RBI had mooted the idea of normally permitted lending limit (NPLL) for them. But the current pricing trend is negating both this concept as well as the logic of tenor premium. Ideally, benchmark yields should move down if the risk is underpriced.
Interestingly, banks have adjusted deposit rates significantly upwards in October. Also, given that 45 per cent of bank deposits are the low-cost CASA (current account savings account), it is only the 55 per cent of the term deposits that need adjustments and hence ideally, the 190 bps increase in the repo rate could result in 105 bps increase in the deposit rates of the latter category.
Banks with better franchise and digital orientation will ensure that retail deposits triumph over wholesale deposit mobilisation in the long-run, coupled with the fact that meeting the liquidity coverage ratio or the LCR norms is the exclusive prerogative of mobilising only through retail deposits.