Deposits and credit gaps put banks to task


During the first fortnight of January 2024 the gap between credit and deposit growth stood at 7.09 per cent. The gap has increased versus the number it was as on the last fortnight of September 2023

Notwithstanding a growing loan book, improving net interest income and margins, and superior asset quality, domestic banks are facing a peculiar problem which is not small by any yardstick. This problem is a bulging gap between their credits and deposits, an issue that is grabbing a lot of eyeballs and putting the limelight on the future growth prospects of banks. 

According to the Financial Stability Report (FSR) published by the Reserve Bank of India (RBI), during the first fortnight of January 2024 the gap between credit and deposit growth stood at 7.09 per cent. It has increased versus the number it was reported as on the last fortnight of September 2023.

As of January 12, 2024, the year-on-year (YoY) credit and deposit growth stood at 19.93 per cent and 12.84 per cent respectively, the RBI data on scheduled commercial banks’ statement of position in India shows. According to the latest RBI data, the credit outstanding of the scheduled commercial banks increased by Rs 10,277 crore while deposits declined by Rs 98,848 crore over fortnight ended January 12.

The demand for credit has been growing not just on the retail front but also on the wholesale front. The banks have responded with equal fervour helped by healthier balance sheets. The demand for loan has been high despite a very high interest rate regime where the Indian Central Bank effected six consecutive rate hikes till it decided to put a halt in April of the last year. While there has been no increase since then, it still remains at an elevated level.

Although people have paid higher interests on their loans, banks have benefitted from higher interest incomes.

Changing Trends

The declining trend in deposits is not a difficult thing to decode. Money lying in the bank accounts are people’s deposits with the banks which offer very little incentive for people in terms of interest rates they offer. There are fixed income instruments that offer returns higher than the current inflation, but are they good enough to create a healthy corpus to meet emergencies or unforeseen expenses? The answer is no.

August was an aberration when the deposit growth in banks reached a six-year high of 13.5 per cent in the fortnight ended August 11. A media reports said that it was the first time since 2017 that the deposit growth has crossed 12.5 per cent.

People are gradually drifting away to other investment options with information available at a click of mouse or a scroll on their mobile phones.

India is still at a very nascent stage when it comes to the penetration of health and life insurance products but the pandemic was a big eye-opener for many at least in the urban centres. The country is now the fifth largest life insurance market in the world with current annual growth rate being pegged between 25-30 per cent. This is a good indicator as to where the money is going. People now realise that health and life insurance products may be zero return products but what they offer is of immense value.

The biggest surprise has come in the form of the growth in Indian capital markets since the onslaught of the Covid-19. There are over 13 crore registered demat accounts now with new demat accounts’ getting added even as we speak. In December a whopping 40 lakh new accounts were opened. Armed with information and proliferation of stock market brokers, people are drifting swiftly towards this avenue.

Moreover, mutual funds have given options to the people to invest in systematic investment plans (SIP) which means some part of their monthly savings is going into these instruments on a monthly basis. With professional fund managers running these schemes, investors are not losing their sleeps.

Not just these, there is bond market where people can take advantage of existing high yields (higher interest rates than savings account interest rates) and informed investors are investing in avenues like the liquid funds to meet their recurring expenses.

People with a heart for real estate have options in the form of Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InvITs) without having the need to own real estate properties. These options give you proportional ownership in real estate and infrastructure projects while offering you incomes and saving you from blocking large amount of funds at one go.

The biggest threat comes from the capital markets.

All this is eating into the deposits of the banks and this trend is not looking to come down.

Growth Headwinds

Do banks’ credit disbursement depend entirely on bank deposits? Well banks have resources to raise funds from the markets and they can also raise from the RBI. But with the growing gap between the credit and deposits, their books could potentially start taking a hit at some stage.

Here’s why! There is a broader agreement among experts that the interest rate cycle has peaked and at some point, the interest rate will start coming down. It could be June or September or later. As and when this happens, the banks will have to really up their games to sustain their net interest incomes at same levels they are now. Failure to do so could hit their margins. Both these indicators are a strong precursor to banks’ growth.

To compensate for lower interest income, the banks will have to lend more which will depend upon their liquidity position and the extant demand for credit.

There are likely to be headwinds on the liquidity front as well as the banks are required to keep 18 per cent for GSecs and 4.5 per cent as cash reserve ratio (CRR).

Moreover, in the absence of adequate deposits, the banks’ borrowing requirements could go up which will increase the cost of funds for them.

For non-banking financial corporations (NBFC), the challenge will be even more. 

So, the banks will have to navigate through multiple challenges to ensure that their growth remains intact.

Outlook

This is a reality that the banks will have to live with. They realise that with the growing financial awareness not all people will leave their money sitting idle in savings accounts or lock them in fixed deposits for longer time periods. Instead, they will take advantage of the avenues now available to them. Fingers crossed!

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