HomeLatest NewsTightening liquidity may force banks to compete harder for deposits

Tightening liquidity may force banks to compete harder for deposits

Mumbai: Indian Banks Analysts have warned that banks may be forced to compete harder to raise deposits amid liquidity and rising credit demand ahead of the festive season.
Earlier this week the banking system fell into a liquidity deficit for the first time in nearly 40 months, prompting the Reserve Bank of India to inject funds into the system.
“We think the real challenge is the gap between deposit growth and loan growth, as deposit growth is weak, at 9.5% YoY – a good 600 bps below loan growth,” said Suresh Ganapathi, head of financial research at Macquarie.
“In the next few weeks, liquidity will tighten as the festive season gathers steam. Also, people tend to hold a lot of cash during the festive season, and this worsens the liquidity situation,” Ganapathy said.
Bank loans rose 15.5% in the two weeks to August 26 from a year earlier, while deposits rose 9.5%, RBI data showed earlier this month.
Due to the excess liquidity in the banking system over the last few years due to the cash injected by the RBI during the pandemic, banks have chosen to rely on raising funds from the money market to support the existing demand for credit.
But with credit growth at multi-year highs and the RBI focusing on reducing liquidity to curb inflation, avenues of cheap funding are drying up.
“Banks were reluctant to raise deposit rates due to excess liquidity in the system but lending rates were immediately raised,” said Rupa Rez Nisur, chief economist at L&T Financial Holdings.
“This has to change and if not, the RBI will come down heavily on banks. Over-reliance on bulk deposits is bad for the overall financial stability of the economy,” he added.
Bankers agree that relying on debt markets to raise funds to support growth may not be sustainable.
A senior executive of a state-owned institution said, “Borrowing from the market to fund credit growth is one way and after a while it is unsustainable. Bank.
According to a report by India Ratings, the average amount of CDs raised by banks rose sharply to Rs 400 billion in the first quarter of FY23 compared to Rs 260 billion in the previous quarter.
Other bankers agree.
Bulk deposits, or deposits above Rs 20 million, are growing faster than retail, highlighting banks’ focus on raising more funds quickly.
State Bank of India’s 1 to 2-year retail term deposit rate rose by 15 basis points to 5.45% in August, while the bank raised its bulk deposit rate by 75 bps to 6% for the same tenure.
“Credit growth generally picks up in the second half of the year and with the festive season and the economy picking up, we expect a strong demand, so deposit collections will pick up,” said another banker.
Analysts believe banks may feel some impact on their margins in the coming quarter as the scramble for deposits intensifies.
The cumulative credit to deposit ratio has already crossed 100%, suggesting that banks have started lending more than their total deposits.
“There may be some impact in the next few quarters that lenders will feel on margins as the gap between lending and deposit rates narrows but this will be a short-term impact as banks will be able to pass on the cost to borrowers,” said Karthik Srinivasan, analyst at ICRA.


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