While bank credit have been growing at over 13 per cent over the last few months, a report prepared by ratings agency Crisil points that an estimated 13-14 per cent growth in bank credit between fiscal year 2019 and fiscal year 2020 would require banks to aggressively raise around Rs 20 lakh crore in deposits.
Though the report points that banks will have to raise around Rs 25 lakh crore, they can manage around Rs 5 lakh crore through release of SLR funds.
“To meet this credit growth, banks will have to raise about Rs 25 lakh crore over the two fiscals. While Rs 5-6 lakh crore is expected to become available through the release of statutory liquidity ratio funds, Rs 20 lakh crore would need to be raised through fresh deposits,” said the Crisil report.
“That would be well above the average annual deposit mobilisation of Rs 7 lakh crore over the past few years. It would also put upward pressure on the interest rates bank offer on deposits,” it further said.
Between October 2016 and March 2018, bank credit grew in single digit, hitting a low of three per cent in February 2017, before registering a low growth of 3.3 per cent each in December 2016 and January 2017.
However, beginning April 2018, the credit growth has been in double digits and hit a 55-month high of 13.6 per cent in November 2018.
Challenge to raise deposits in the coming months
Considering that deposit growth has been declining over the past decade, it would be a challenge to raise deposits in the coming months. In the past three years, the interest rates offering on fixed deposits has dipped below the returns on other financial investment avenues, which has resulted in a divertion of the flow of household financial savings away from banks. What could be different this time around is that private banks, with strong balance sheets and robust credit growth, are expected to lead the race for deposits and could account for 55-60 per cent of the incremental deposit mobilisation, thereby beating the PSU banks in this objective.
The report estimates that bank credit in India would grow at a pacy 13-14 per cent on average between fiscals 2019 and 2020, significantly faster compared with the 8 per cent seen in fiscal 2018 and said that, “Aggressive deposit mobilisation likely over medium term mainly led by private lenders.” It further pointed that this requirement is expected to force the banks to change their deposit mobilisation plans over medium term.
Traditionally, banks have utilised their excess SLR in the initial period of credit revival and they would do that this time around, too, said that report. It however, added that the bulk of the credit demand would be met by deposit growth and to a minor extent by other resource raising options like infrastructure bonds.
It added that it expects banks to maintain on average 4 per cent surplus SLR when credit growth picks up, compared with 8 per cent as of now.
“This, when juxtaposed with the Reserve Bank of India’s plan to reduce the SLR limit to 18 per cent by March 2020, would translate to a release of Rs 5-6 lakh crore from the SLR kitty to meet credit demand,” the report said.
The challenge to raise deposits comes at time when deposit growth has been declining over the past decade, and particularly in the past three years when it saw the interest rates offering on fixed deposits dipping below the returns on other financial investment avenues, which in turn diverted the flow of household financial savings away from banks.
It pointed that private banks with strong balance sheets and robust credit growth are expected to lead the race for deposits and will account for 55-60 per cent of incremental deposit mobilisation.
In fact, private banks have already gained 7 per cent market share in deposits overpast five years to touch 30 per cent, and are well poised to gain further, the report said.
“Over the first nine months of this fiscal, banks have already raised deposit rates by an average of 40-60 basis points We expect banks to sharpen focus on deposit mobilisation over the medium term through attractive rate offerings across tenors in both bulk and retail segments. That, in turn, could further increase the cost of funds of banks, given that deposits account for the bulk of their funding,” said Rama Patel, director, Crisil Ratings.