Private Banks Stretch Deposit Base To Meet Rising Credit Demand

The credit-deposit ratio—a measure of how much a bank is lending out of its deposits—of the top six private lenders is at about 96 percent as of December against the average of around 87 percent over financial years 2011-2018, according to the data available on the banks’ websites. By comparison, for the top three public sector peers, credit-deposit ratio was about 71 percent as of December against the long-term average of around 75 percent.

For all Indian banks, the loan-to-deposit ratio stood at 77.92 percent as on March 1, the highest in three months, the Reserve Bank of India’s data showed.

What matters more is the incremental credit-deposit ratio, which reflects how much new credit is being generated out of fresh deposits coming in.

For private banks, the incremental credit-deposit ratio is at 100.5 percent and for public sector banks it is at a 119.5 percent, showed data from India Ratings.

A high credit-deposit ratio leaves banks strapped for liquidity and, over time, can dent margins as lenders are forced to raise higher cost ‘bulk deposits’ from the markets.

“The Indian banking system has been witnessing a sustained recovery in credit growth since early 2017...Recovery has been witnessed in private as well as public sector banks. However, deposit funding has not been able to keep up pace with this loan recovery,” said Bernstein a report earlier this week.

In particular, private lenders are grappling with slower growth of savings deposits, according to Bernstein Research. Such deposits had jumped after demonetisation. While the high-base effect has worn off, according to the report, savings deposits rose at a slower pace than loans for private lenders.

Savings deposits are important to banks since they are raised at a lower cost than fixed deposits.

Low deposit growth is not only because of technical reasons such as rising currency in circulation, but also structural and cyclical factors, according to Edelweiss Securities. These factors include constant moderation in nominal GDP growth and a change in households’ behaviour from being savings-focused to consumption-focused.

The brokerage, however, said the low deposit growth is “close to bottoming out”. An expanding savings pool may drive deposit growth, according to the report.

Besides, public sector lenders who have exited the prompt corrective action framework may now work to increase their deposit base. Also a more aggressive strategy by private peers with stretched credit-deposit ratios is expected to lift overall deposit growth, it said.

For now, with deposit growth remaining below credit growth, banks may increase their reliance on bulk deposits. Certificate of deposits, used to raise such funds, rose 24.6 percent year-on-year during April 2018-February 2019, according to India Ratings.

Lalitabh Srivastava, assistant vice president for research at Sharekhan, doesn’t see this as a near-term concern. “Credit demand is slowly coming back and in anticipation banks are trying to channelise resources from other than low-cost deposits. But in the near term, I do not see much impact on the margin,” he said. “Also, banks were sitting on low base of bulk deposits, so that is going to normalise now.”