MUMBAI: Indian banks may be forced to compete harder to boost deposits amid tightening liquidity and rising credit demand ahead of the festive season, analysts warned.
Indian banking system liquidity slipped into deficit for the first time in nearly 40 months earlier this week, prompting the Reserve Bank of India to infuse funds 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 – a good 600 bps below loan growth," said Suresh Ganapathy, head of financials research at Macquarie.
"As the holiday season intensifies over the coming weeks, liquidity will become even tighter. Additionally, during the holiday season, people frequently hold large amounts of cash, which exacerbates the liquidity crisis "added Ganapathy.
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.
"If this doesn't change, the RBI will punish banks severely. The entire financial soundness of the economy is negatively impacted by an overreliance on bulk deposits "Added she.
Bankers concur that it might not be feasible to raise money for development just through the debt market.
"One of the methods is to borrow from the market to finance credit development, but this method eventually runs out of steam. Therefore, we will need to start hiking rates more quickly in the months to come "a senior executive at a state-run bank stated.
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.
Other bankers concurred
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%.
Another banker added, "Deposit mobilisation will increase." "Credit growth normally comes up in the second part of the year, and with the festival season and economy ramping up, we predict a high demand," he said.
Analysts predict that banks' profitability may be affected in the upcoming quarters as the competition for deposits heats up.
The incremental credit deposit ratio has already crossed 100%, suggesting that banks have started lending more than the total deposits they hold.
"In the next couple of quarters there may be some impact that lenders will feel on margin as the gap between lending and deposit rate narrows but it will be a short-term impact as banks will be able to pass on the cost to the borrowers," said Karthik Srinivasan, analyst at ICRA.
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