By Ajay Ramanathan
Banks are likely to be hit by a liquidity crunch going ahead as the growth in loans has outpaced deposits growth, say analysts. This lag in deposit growth comes at a time when the Reserve Bank of India (RBI) has been removing surplus liquidity from the system in a bid to fight inflation.
“Banks had run up their cash reserves and money available at short notice in the last one-two years. They have used some of that money to fund their asset growth. The excess statutory liquidity-qualifying securities that they were running have come down. Especially, small and mid-sized banks have ramped up their repo borrowings,” Jindal Haria, financial institutions director, India Ratings and Research, said. “Going ahead, banks may have to continue to raise their deposit rates much more and rely more on the wholesale side. So, liquidity for banks will be somewhat tighter.”
To put things in perspective, bank loans rose 17.9% on year to Rs 128.9 trillion as on October 21, the latest fortnightly data from the RBI showed. This is the highest year-on-year growth in advances in around nine years. On the other hand, deposits lagged behind, rising 9.5% on year to Rs 172 trillion.
The sharp growth in loans has been due to demand for retail credit and increase in working capital demand among corporates, credit rating agency CareEdge said in a report dated October 22. The report showed the credit-to-deposit ratio rose by 525 basis points on year to 74.5% for the fortnight ended October 7.
In a bid to catch up with rising demand for loans, several banks have already begun to raise fixed deposits at higher interest rates.
Axis Bank has hiked its interest rate on fixed deposits by up to 115 bps effective from Saturday, the bank’s second deposit rate hike in two consecutive months.
State Bank of India hiked the interest rate on most retail term deposits below Rs 2 crore by 25-80 basis points, effective October 22. On October 15, It had hiked rates on term deposits by 10-20 bps.
Going ahead, analysts say banks would have to hike the rates on deposits at a faster pace albeit in a calibrated manner.
“In terms of deposit rates, the fact is that it is a changing scenario. It is yet to stabilise in terms of where deposit rates would end up. It does make sense that you are a little bit flexible in terms of increasing deposit rates so that you can align to whatever is the stable state in coming months,” Bank of Baroda MD and CEO Sanjiv Chadha said in the July-September earnings call.
“Therefore, I would believe that till such time as we reach a stable state, the change in deposit rates will be to make sure that you are able to attract incremental deposits and align with whatever the loan growth might be,” he added.
However, this hike in deposit rates is unlikely to dent net interest margins of banks for the next two quarters at least, as the repricing of deposits occurs at a slower pace than loans. However, banks could bear a higher cost of deposit in 2023-24 and this has an impact on their margins, say analysts.
“Eventually, deposit costs will go up, but I think equally we are likely to see the impact of the normalisation of interest rates. The fact that deposits growth is lagging means that liquidity returns to normal and that would also mean that pricing power returns to the bank,” Chadha said.