Banks in a Fix as De­posit Growth Hits 50-yr Low, Loan Dis­burse­ment Rises

This may limit fall in bor­row­ing costs as banks may be forced to raise de­posit rates if de­mand for loans ex­pands

The Economic Times - - Commodities Plus -

Saikat Das & Gay­a­tri Nayak

Mum­bai: In­dian banks are fac­ing a pe­cu­liar prob­lem –– de­posit growth is at a five-decade low, and loan growth is be­gin­ning to get bet­ter af­ter five years of fall –– which is prob­a­bly lim­it­ing the fall in bor­row­ing costs as banks may be forced to in­crease de­posit rates if de­mand for loans ex­pand.

Banks are re­duc­ing the pro­por­tion of their gov­ern­ment bond hold­ings to the to­tal de­posits as they be­gin to lend more than the pre­vi­ous years, data from the Re­serve Bank of In­dia shows. The so­called credit-to-de­posit ra­tio has surged to 77.6% in March 2016, from 76.5% a year ear­lier, in­di­cat­ing that banks are lend­ing a big­ger por­tion of ev­ery .₹ 100 taken as de­posit. If the cur­rent trend con­tin­ues, even gov­ern­ment bor­row­ings could get costlier. As banks re­duce the pro­por­tion of pur­chase of gov­ern­ment bonds, yields on them could climb and con­se­quently raise costs for even cor­po­rates. “Re­tail loans have been the largest con­trib­u­tor to bank credit growth in the past one-two years,” said Sau­gata Bhat­tacharya, chief econ­o­mist Axis Bank. “In the past cou­ple of months, cor­po­rate work­ing cap­i­tal bor­row­ings through com­mer­cial pa­per have par­tially re­verted to banks (due to fall­ing gap in their re­spec­tive in­ter­est rates).” De­posit growth fell to 9.9% in the last re­port­ing Fri­day of FY16, from10.7% a year ago, RBI data shows. But loans grew 11.3% in the last Fri­day of March, from 9% a year ago. De­posit growth rate is the lowest since 1962-63. While loans growth has re­versed, the five year trend in slow­ing down.

The bank­ing land­scape has also un­der­gone a change with two new banks –– Band­han Bank and IDFC Bank –– start­ing op­er­a­tions this fis- cal. They are es­ti­mated to add .₹ 5060,000 crore to the loan book of bank­ing sec­tor. Econ­o­mists feel if the slow­down in de­posits con­tinue, with a pick-up in credit de­mand, there could be pres­sure on rates. “This year, bank loan growth may im­prove mod­estly, but if de­posits do not grow com­men­su­rately, the fund­ing mis­match may im­pede rate trans­mis­sion,” said Bhat­tacharya.


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