Indian banks are battling the worst deposit crunch in 20 years

Banks hiked deposit rates last fiscal year to draw in retail deposits. (Hemant Mishra/Mint)
Banks hiked deposit rates last fiscal year to draw in retail deposits. (Hemant Mishra/Mint)

Summary

  • At 80%, the credit-deposit or CD ratio is at its highest since 2005, from when this ratio is available, showed data from RBI

MUMBAI : Banks in India struggled to attract deposits in 2023-24 even as credit growth turned stronger. Data from RBI showed the credit-deposit ratio at its highest in at least 20 years as loan offtake rose across categories including home loans and other loans for consumption.

At 80%, the credit-deposit or CD ratio is at its highest since 2005, from when this ratio is available, showed data from RBI. The CD ratio indicates how much of a bank’s deposit base is being utilized for loans. The FY24 data is up to 22 March, the last fortnight for the previous financial year.

“Customers are chasing high-return, equity linked-products," said Bhavik Hathi, managing director of consulting firm Alvarez and Marsal, adding that the solid performance of equity markets in the past few months and rising financial literacy have encouraged investors to put in money into such securities for higher returns.

Banks hiked deposit rates last financial year to draw in retail deposits, as they faced increased competition from peers, other investment avenues, and some shift in preferences from financial assets towards real assets.

The next set of data on credit and deposit is expected to be released for the fortnight ending 5 April. To be sure, Mint used the aggregate bank credit data and not just the non-food data — bank credit after adjusting for loans given to the Food Corporation of India (FCI) — to calculate the CD ratio.

Experts said that high CD ratio increases the reliance of lenders on high-cost, bulk deposits, which may also not be part of the core depositor base of the bank. “Such bulk deposits may also be prone to higher outflows, which may pose liquidity risk to banks," said Anil Gupta, senior vice-president, co group head-financial sector ratings, Icra Ltd.

Also read: Behind the worst bank deposit crunch in nearly 20 years

Subha Sri Narayanan, director, Crisil Ratings said that in the past few quarters, lenders have used their excess statutory liquidity ratio (SLR) holdings, which supported credit growth despite the lower deposit growth. Mint reported in January that banks were liquidating some of their investments in sovereign securities to fund an insatiable demand for loans. SLR is the proportion of deposits that banks have to mandatorily invest in approved securities.

The pace of growth of bank credit surpassed deposit growth in FY24, the data showed. In FY24, while deposits grew 13.5% to 204.8 trillion, non-food credit grew 20.2% to 164.1 trillion as on 22 March. In FY23, deposits grew 9.6% and credit 15.4%.

To be sure, the deposit and credit growth in FY24 would have declined to 12.9% and 16.3%, respectively, if additions owing to erstwhile mortgage lender Housing Development Finance Corp. (HDFC) and HDFC Bank’s merger on 1 July are removed. The merger led to HDFC’s loans and deposits becoming part of the banking system, adding to the overall numbers.

“This gap between credit and deposit growth has narrowed from the previous high of about 500 bps (basis points) in FY23, driven largely by periodic deposit rate hikes by most banks in a bid to attract deposits—a trend that started around October 2022. However, at 300 bps, it remains significant," said Narayanan. A basis point is one-hundredth of a percentage point.

Meanwhile, a clutch of banks has made progress on the CD ratio front. The March quarter business numbers published recently by several banks showed that many private banks—HDFC Bank, RBL Bank, Yes Bank, Bandhan Bank, besides others—posted lower CD ratio or loan-to-deposit ratio, per an analysis by Macquarie.

That said, experts are divided on the trajectory of CD ratio for the banking sector. As per Gupta of Icra, the overall CD ratio for the banking sector is likely to remain high. Others see some moderation going ahead. According to Hathi of Alvarez and Marsal, the higher funding cost, rising asset-quality risk in unsecured retail loans, and RBI’s recent actions to curb such loans will see a slowdown in the credit growth to 12-14% year-on-year over FY25 to FY27.

“Moreover, a likely rise in overall deposit growth to 13.5%-14.5% y-o-y over FY25-FY26 will promote moderation of CD ratio going forward," said Hathi.

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