Banks struggle with deposit accretion
2 min read . Updated: 02 Mar 2023, 12:45 AM IST
PremiumIndia Ratings cautioned that banks, especially public sector banks, would struggle to secure low-cost deposits
Mumbai: Indian banks must mobilize deposits without hurting margins while making additional provisions for the transition to the proposed expected credit-loss accounting model, rating company India Ratings and Research said on Wednesday.
“Deposit repricing will continue to happen in a competitive environment, especially as banks have drawn on almost ₹5 trillion of liquidity since March 2022 that has enabled reasonably priced and evenly paced deposit mobilization," it said in a statement.
India Ratings cautioned that banks, especially public sector banks, would struggle to secure low-cost deposits as they expand their loan books faster than in the last 5-7 years. Banking sector credit, which rose 18.8% from a year earlier in the December quarter, is expected to continue outpacing the growth in deposits, which increased 11.3%, leading to an increase in deposit rates and intensifying competition among banks to expand their deposit franchise.
While the repo rates have increased by 250 basis points (bps) since May 2022, deposit rates have increased only by 150-200 bps, implying that the transmission will continue in the near term. It added that banks are still offering the highest interest rates on deposits with tenors of one to three years, reflecting the requirements of asset-liability management along with the unwillingness to offer a tenor premium to lock in longer tenor deposits. “Banks are also resorting to using wholesale deposits, including bulk deposits, opportunistically to meet the demand for lending. The level of outstanding certificates of deposits (CDs) in the system at ₹2.8 trillion is up 2.8 times (from a year earlier)," it said.
According to India Ratings, even the share of CDs in the overall term deposit profile of banks has shown a sharp uptick. In the recent past, the rating company said it saw almost a 100 bps difference between the rates at which banks have raised one-year CDs versus their one-year term deposit rates, indicating the potential for a further increase in term deposit rates in the near term.
“The real interest rate, as indicated by G-sec rates less inflation, holds a direct correlation to the deposit multiplier. Considering Ind-Ra’s estimates for macro variables, the deposit growth for FY24 could be 9-11% ceteris paribus and may act as a limiting factor for advances growth," it said.
With a rising interest rate environment and persistent inflation, the Reserve Bank of India (RBI) remains in withdrawal of accommodation mode, and India Ratings said this and a high base effect, would mean that banking system credit would slow to 13.5% in FY24, from 15% in the current fiscal year.