Deposit growth has stalled as high inflation has led to lower savings as would-be depositors choose to put their money in stocks and mutual funds in search of better returns, Madan Sabnavis said. chief economist of the public creditor Bank of Baroda.
In order to increase the growth of its deposits, the country’s largest private creditor, HDFC Bank, has launched a short-term campaign to increase its deposits by offering a higher interest rate on non-resident accounts held by Indians living abroad. Analysts believe that other creditors could also follow suit with similar measures.
As excess funds from the system are slowly withdrawn by central bank measures, banks’ margins and profitability could come under pressure, forcing them not only to raise deposit rates, but also to turn to to more expensive capital markets to raise the funds needed to meet the demand for credit.
That could worry investors, already on the back foot due to global factors, and send bank stock prices falling further.
Credit rating agency ICRA said in a note last week that it expects banks “to begin chasing deposits aggressively, which will also lead to higher deposit rates.”
Chart: Growth in Indian bank deposits-
Growth in Indian bank deposits, currently at 9.8%, has remained in single digits for much of the past 14 months, while credit growth – which had hit a record high of 5.6% over the past fiscal year 21 – nearly tripled to 14.4% in the two weeks to July 1.
Chart: Indian bank credit growth-
Growth in retail lending, which includes personal loans, mortgages and auto loans, has steadily increased at a faster rate and continues to outpace business credit.
“Personal loans have been the main driver of growth in the Indian banking sector over the past few years as corporate loans have stagnated due to NPAs (non-performing assets) and deleveraging,” CARE Ratings said in a published report. earlier this week.
Looking ahead, although the outlook for credit growth looks bright, high inflation and rate hikes could cast a shadow, CARE said.
Chart: India Credit Sector Growth- 
The credit/deposit ratio of banks – currently 73% of total bank deposits are on loan – is steadily increasing, indicating that their earning capacity is also improving.
But with demand for credit picking up, there could be pressure on funding if deposit growth doesn’t keep pace.
“In the next few months, if the trend continues, we will have no choice but to increase deposit rates, because the market conditions are also not very favorable to allow us to go on the market. market to raise growth capital,” said a senior executive at a state-owned bank.
Chart: Indian Banks Credit-to-Deposit Ratio- 