With deposits contracting and lending going up, why should banks lower interest rates?
In the last one month or so, between 27 October and 24 November 2017, bank deposit growth has been negative, while bank credit growth is up Rs44,956 crore. In the three months between 25 August and 24 November 2017, bank deposits went up Rs2.5 trillion, while bank credit rose by Rs2.7 trillion. That’s an incremental credit-deposit ratio of 108% over the last three months.
It’s no wonder then that a couple of banks have increased the interest rate for bulk deposits.
Chart 1 shows that banks’ overall credit-deposit ratio has been rising steadily. Demonetization resulted in a flood of deposits into banks while their lending operations suffered. As a result, their credit-deposit ratio went down. But as deposit growth fell and credit growth went up, the credit-deposit ratio too increased till it’s now almost back to where it was before demonetization.
As on 24 November, while bank deposits increased 3.5% from a year ago, bank credit growth was up 9.6% year-on-year.
Bank credit growth could be on account of a pickup in demand due to low interest rates, or it may be a clawing back of market share from non-banking financial companies.
As lending has picked up, banks have sold off government securities and as on 24 November, the year-on-year increase in investments in government securities was just 3.9% (see chart 2). No wonder yields on government securities have gone up.
The Reserve Bank of India may want banks to lower interest rates, but with deposit growth contracting and lending picking up, there’s no reason for them to lower their rates.