Banks ready for a fight for consumer deposits

Total deposits in the system stood at ₹168 trillion as of 15 July, 8.4% more than the year earlier. Aggregate non-food credit, on the other hand, grew at a faster pace of 13.5% to ₹123 trillion. After falling behind deposit growth for over three years, credit growth is now outpacing it as demand for retail and corporate loans rises in tandem.

Rising money market rates after the Reserve Bank of India (RBI) raised the repo rate by 90 basis points (bps) in two tranches have also nudged large borrowers to tap bank funding, leading to higher corporate loan growth.

An analysis by rating company ICRA Ltd said that incremental deposit growth is expected at ₹13-14 trillion in FY23, compared with incremental credit growth of ₹12-13 trillion.

However, adjusted for capital buffer requirements such as statutory liquidity ratio (SLR) and cash reserve ratio (CRR), the amount of ‘lendable’ deposits may fall short of the incremental credit by ₹1.9-2.1 trillion. This, it said, will increase the competition for deposits in the coming months.

To be sure, banks have already started raising deposit rates, but not across tenors and segments. The ICRA report from July found that for a sample of 30 large banks, the average hike in the six-month and one-year deposit rates for banks during the April-July period was limited to 15 basis points (bps) and 25 bps, respectively. The hike has been larger for short-term wholesale deposits. One basis point is one-hundredth of a percentage point.

Some lenders are banking on the correction in real returns on deposits in the current rising interest rate scenario to bring back deposits.

Mint reported in June that despite the recent flurry of deposit rate hikes, the real return on bank deposits remained negative, signalling the impact of runaway prices on domestic savers.

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“There were, of course, challenges in terms of having negative real rates, which now has started correcting, and I believe that as the interest cycle continues, we should be seeing better deposit growth going ahead," Sanjiv Chadha, chief executive of Bank of Baroda, said on 30 July.

Chadha said that deposit rates, albeit with some lag, will find a new level; real interest rates, which have been negative, will also get corrected. “Therefore, money flowing to channels outside banks will start coming back," he said.

Bank of Baroda’s domestic deposits grew 8.5% year-on-year (y-o-y) to ₹9.1 trillion while contracting 1.9% sequentially.

Several banks saw a decline in deposits when compared with the previous quarter, and bankers said it was due to the sizeable government deposits present in the previous quarter that raised the base.

“We consciously wanted to strengthen our resource base and introduced some new deposit schemes last month. Since there is an upward trend in interest rates, we thought we would be getting some early-bird advantage," A.K. Das, chief executive of Bank of India, said on Tuesday.

If there are any liquidity issues, the bank will be able to take care of that with the resource mobilization strategy, Das said.

The bank’s domestic deposits shrank both on a sequential as well as a year-on-year basis to ₹5.5 trillion as on 30 June, and the lender expects a 5-6% growth in FY23.

“Post-covid, after two years of being flush with funds, the retraction (of liquidity) has started two-three months back. That is why many banks are in a rush to mop up resources," said Das.

Analysts at ICRA pointed out that as large wholesale depositors have alternative options to park surplus funds at market-determined rates, banks with a higher share of wholesale funding or rate-sensitive deposits will have to hike their deposit rates faster. This, in turn, would also prompt other banks to hike their deposit rates.

“As the deposit growth is still lagging, the liquidity surplus for banks is expected to decline further in the coming months, thereby pushing them to aggressively start chasing deposits, which will also lead to higher deposit rates," it said.

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