The gap between credit growth and deposit growth is widening. There are growing concerns that sub-9 per cent growth in deposit may pose funding challenges to lenders as they enter the festival season that sees high credit demand.
However, experts believe that the banking system liquidity is still comfortable since banks are parking over Rs 3 trillion in the standing deposit facility (SDF) and the reverse repo window of the Reserve Bank of India (RBI).
As liquidity in the system gets eroded to support high credit demand, banks may soon have to start chasing deposits aggressively, which, in turn, will lead to higher deposit rates.
According to the latest figures from the Reserve Bank of India (RBI), credit growth in the system was 14 per cent in the fortnight ended July 15. However, deposit growth was merely 8.4 per cent during the same period, resulting in a splayed credit–deposit growth gap of 560 basis points (bps).
“…we remain concerned about deposit growth at sub-9 per cent and the gap with credit growth at 14 per cent widening to over 500 bps,” said Suresh Ganapathy and Param Subramanian of Macquarie Research.
According to them, the main issue behind lagging deposit growth is the cash reserve ratio hike by the RBI, which is keeping liquidity tight and affecting base money growth.
“Bankers suggest that many corporate treasuries prefer parking in liquid funds that offer overnight liquidity at higher rates rather than park a seven-day deposit with a bank at lower rates,” they said.
Further, while lending rates have moved up consequent to the consecutive repo rate hikes by the RBI, deposit rates have not kept pace.
“While banks have been quick to increase their lending rates, transmission to deposit rates has been relatively slow. Deposit rates are dependent on demand for credit, as well as liquidity conditions in the banking system. As pick-up in credit demand gathers momentum, banks may be forced to raise deposits at higher rates to meet this additional demand,” the RBI noted in its July bulletin.
To fund incremental credit demand in the economy, banks have increasingly relied on certificates of deposit. Their outstanding volumes have risen a whopping 243 per cent as on July 1 on a year-on-year basis to Rs 2.4 trillion, according to rating agency ICRA.
“Given that the banks are parking over Rs 3 trillion in the SDF window and in the reverse repo window, the banking system liquidity is still comfortable. While the liquidity surplus will reduce, given that credit growth has been outpacing deposit growth, we expect the necessary measures introduced by the RBI to ensure the liquidity conditions remain comfortable in the banking system,” said Anil Gupta, vice-president-financial sector ratings, ICRA.
“Yes, there could be a rise in deposit rates and lending rates, given the increase in policy rates, as well as declining liquidity surplus. However, we expect necessary measures from the regulator to ensure the credit supply to the productive sectors of the economy continues,” he added.
According to the latest sectoral data, credit growth has been robust, aided by 18.1 per cent growth in the unsecured loan segment, primarily driven by housing and vehicle loans.
Credit to industry has also expanded 9.5 per cent during this period.