Banking Squeeze Intensifies: Deposits Lag Loans by 200 BPS as RBI Data Reveals Tightness

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AuthorAnanya Iyer|Published at:
Banking Squeeze Intensifies: Deposits Lag Loans by 200 BPS as RBI Data Reveals Tightness
Overview

Latest RBI data for December 12 shows deposit growth slowing to 9.7% year-on-year while credit growth accelerated to 11.7%. This 200 basis points gap highlights persistent deposit tightness in India's banking system, pressuring banks to fund rising credit demand and potentially pushing savers towards equity markets for better returns.

Banking System Faces Deposit Tightness Amidst Strong Credit Demand

Latest data from the Reserve Bank of India (RBI) indicates a growing disparity in the banking sector, with deposit growth easing to 9.7 per cent year-on-year (Y-o-Y) in the fortnight ended December 12. Concurrently, credit growth picked up pace, reaching 11.7 per cent Y-o-Y. This divergence has resulted in a significant credit–deposit growth gap of 200 basis points, underscoring persistent deposit tightness within the banking system.

Core Issue: Funding Loan Growth

Overall bank credit expanded to ₹196.5 trillion as of December 12, a substantial increase from ₹175.86 trillion in the same period last year. Credit saw a growth of ₹1.2 trillion during the fortnight itself. However, total deposits, while standing at ₹242.14 trillion, saw a decline of ₹45,344 crore during the same fortnight. This imbalance presents a challenge for banks needing to fund robust credit demand, especially heading into the fourth quarter.

Financial Implications and Investor Behaviour

Indian banks are navigating a delicate situation. While they need to mobilise deposits to sustain credit expansion, they also aim to protect their net interest margins (NIMs) by avoiding sharp increases in deposit rates. The current environment of lower returns on bank deposits is reportedly pushing some savers to explore equity markets for potentially higher yields. This dynamic complicates deposit mobilisation efforts for financial institutions.

RBI's Liquidity Management Measures

The Reserve Bank of India is actively implementing measures to ease liquidity conditions and support the banking system. These include open-market operations (OMOs), forex swaps, potential cash reserve ratio (CRR) reductions, and easing of liquidity coverage ratio (LCR) norms. The central bank recently announced its intention to inject close to ₹3 trillion into the system through OMOs and a three-year dollar-rupee buy-sell swap valued at $10 billion.

Certificates of Deposit Gain Traction

Amidst the ongoing tightness in traditional deposit mobilisation, banks have increasingly turned to Certificates of Deposit (CDs) as a funding source. In recent fortnights, banks have raised over ₹50,000 crore via CDs each time, with ₹55,359 crore raised in the fortnight ended December 12. CDs serve as a cost-effective alternative to bulk term deposits and aid in replenishing maturing deposits, reinforcing their importance in banks' liquidity management strategies.

Expert Outlook

Anil Gupta, vice-president and co-group head – financial services rating at Icra, noted that while slow deposit growth is a concern, the RBI's liquidity measures are expected to enable banks to comfortably sustain credit growth. However, he anticipates that the banking system's credit–deposit ratio may structurally trend higher in the future due to these ongoing interventions.

Impact

This scenario directly impacts the profitability and operational strategies of Indian banks. It could lead to increased funding costs for lenders and potentially influence lending rates. Furthermore, it signals a shift in investor behaviour, encouraging diversification away from traditional bank deposits towards other investment avenues, including the equity market, in pursuit of higher returns. The overall sentiment towards the banking sector may see increased scrutiny.
Impact Rating: 7/10

Difficult Terms Explained

  • Basis Points (bps): A unit of measure used in finance equal to one-hundredth of a percentage point (0.01%).
  • Year-on-year (Y-o-Y): A comparison of current data with the same period in the previous year.
  • Credit Growth: The rate at which banks increase their total outstanding loans.
  • Deposit Growth: The rate at which customers increase their total deposits in banks.
  • Net Interest Margins (NIMs): The difference between interest income generated by a bank and the interest it pays out to depositors, expressed as a percentage of interest-earning assets. It indicates bank profitability.
  • Open Market Operations (OMOs): The buying and selling of government securities by the central bank to influence money supply and interest rates.
  • Forex Swaps: An agreement to exchange currency and then reverse the transaction at a later date.
  • Cash Reserve Ratio (CRR): The percentage of a bank's total deposits that must be held as reserves with the central bank.
  • Liquidity Coverage Ratio (LCR): A regulatory requirement for banks to hold sufficient high-quality liquid assets to cover their net cash outflows over a 30-day stress period.
  • Certificates of Deposit (CDs): Negotiable, fixed-term debt instruments issued by banks.
  • Weighted Average Lending Rate (WALR): The average interest rate on loans, weighted by the volume of loans at each rate.
  • Weighted Average Domestic Term Deposit Rate (WADTDR): The average interest rate paid on domestic term deposits, weighted by the volume of deposits.
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