MUMBAI: Indian banks' intense efforts to mop up deposits have finally begun to pay off, with liabilities growing faster than assets for the third consecutive fortnight. This trend, which started in the second half of October, continued into the first half of November. It marks the first time in 30 months that this has happened, following a period of aggressive deposit collection by lenders since the credit-deposit growth mismatch began in the fortnight ending March 25, 2022.
The deposit growth is mainly attributed to two key factors. First with markets became, more volatile in October and November, people have chosen not to risk their hard earned money in equities, thus more money remained in their bank accounts. Secondly, bank lending has been losing steam with all the regulatory curbs on unsecured lending and also to bank lending to non-banks.
According to the latest RBI data, for the fortnight to November 15, deposit growth marginally outpaced credit uptick at 11.21 percent. Credit growth had been exceeding deposit growth since the fortnight ending March 25, 2022, leading to a widening gap that reached as much as 700 basis points at its peak in the middle of 2023. On the other hand, credit growth in the reporting fortnight slowed to 11.15 percent, according to RBI.
Banks have been trying every trick in the book to strengthen their liability franchise, including offering special schemes and higher returns.
For the first time in 30 months, deposit growth has outpaced credit growth after it registered a on-year growth of 11.8 percent in the fortnight to October 18, compared to a rise of 11.7 percent in loan growth.
But the momentum did not sustain in the next fortnight. However, its resumed in the fortnight to November 15.
The RBI data show that outstanding deposits in the fortnight ending November 15 stood at Rs 218.54 trillion, while outstanding credit stood at Rs 173.62 trillion. In the previous fortnight to November 1, outstanding deposits were Rs 220.27 trillion, while outstanding credit was Rs 174.37 trillion. Both credit disbursement and deposit mobilisation saw a decline in the reporting fortnight.
Credit and deposits had grown in tandem in the fortnight ending November 1. While credit grew by 11.9 percent, deposits grew 11.83 percent.
It was in the fortnight ending October 18, after 30 months, that deposit growth of 11.7 percent outpaced credit growth of 11.5 percent, possibly signalling the beginning of a period where the liabilities side will keep pace with the asset side of lenders. And this trend reversal took place first time since the fortnight to March 25, 2022, and at some point the gap was as high as 700 bps.
According to industry experts, this loan growth slowdown is driven by several factors, including the RBI’s increase in risk weights on unsecured loans and loans to non-banking financial companies, stress in the unsecured retail segment of banks, and its directive for banks to reduce their elevated loan-to-deposit ratio.
Another key reason is the second largest lender HDFC Bank’s decision to grow its loan book slower than the industry average to bring down its elevated credit-deposit ratio. Following this slowdown, several credit rating agencies have revised their projections, estimating credit growth to be in the range of 13-15 percent and deposit growth in the 12-13 percent range.
But this should ideally be offset by the nation’s largest lender SBI expecting to growth above the industry average when it comes to loan growth. The bank that controls almost a quarter of the credit market is expecting its loan book to clip at 14–16 percent, and deposits at 10 percent this fiscal.
Deposits have remained a key focus so far this fiscal, as banks intensified efforts to strengthen their liability franchises, following the RBI’s and government encouragement to narrow the gap between credit and deposit growth. While private sector banks have grown their deposit franchise well, state-owned banks have been lagging, though they of late mitigated this by tapping into the domestic bond market to raise funds and by selling infra bonds for long term project financing.
But the bankers are not worried about slowing loan demand as credit demand typically picks up in the fourth quarter (January-March period).