Banks are likely to see some relief on the credit-deposit (CD) front as the ratio may to moderate to 75% over FY25-FY27, from nearly 80% in the current fiscal, largely led by a lower credit growth and slightly higher deposit growth, brokerage Emkay Institutional Equities said in a report on Thursday.
This assumes significance as the Reserve Bank of India (RBI) has reportedly nudged certain lenders with CD ratios over 100% to lower it to around 70%-80% level. Private lenders like HDFC Bank, IDFC First Bank and Axis Bank had a CD ratio of 110%, 102% and 93% as on Q3FY24-end, respectively, whereas public sector banks’ average CD ratio was lower at 72%. The CD ratio essentially enables investors to understand how much of a bank’s deposits has been deployed as loans.
“PSBs have hit the purple patch, given their decent LDR/LCR (loan-deposit ratio/liquidity coverage ratio), as they have been prudent in this cycle – sacrificing growth for profitability, improving corporate asset quality, stable & better management profile and the ability to raise growth capital without diluting the BV much,” the report said. However, the slow pace of branch expansion by PSBs will likely lead to their deposit market share moderating in long term.
According to the brokerage, the credit growth is expected to slow down to 12%-14% year-on-year over FY25-FY27E from 16.5% currently, excluding the HDFC merger. The current extended elevated rate cycle and subsequent higher funding cost, coupled with rising asset-quality risk in unsecured retail loans and RBI’s recent actions to curb undeterred growth in unsecured loans, could affect the overall credit growth, it said. Overall deposits are likely to rise to 13.5%-14.5% YoY over FY25-FY26 from 13% in the current fiscal.
Some lenders have reduced the excess cash on the balance sheet to fund credit growth in the recent period, Emkay said, thereby delaying deposit growth and protecting margins. However, most of these levers are now largely exhausted, and banks will have to mobilise deposits to incrementally fund credit growth.