As demand for credit surges in India, banks may soon rush for deposits

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The skyline of Mumbai’s financial district is pictured, after air pollution levels began to drop during a nationwide lockdown to slow the spread of the coronavirus disease (COVID-19), India, April 24 2020. REUTERS/Hemanshi Kamani

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MUMBAI, July 28 (Reuters) – Loan growth in India has hit its highest level in three years and is expected to rise further as economic activity gains ground, but much slower deposit growth could spur banks seek funding and rapidly raise deposit rates, analysts said. and bankers.

Deposit growth stagnated as high inflation led to lower savings as depositors would choose to put money into stocks and mutual funds in search of better returns, Madan Sabnavis said, chief economist of the public lender Bank of Baroda (BOB.NS).

In order to increase its deposit growth, the country’s largest private lender, HDFC Bank (HDBK.NS) has launched a short-term campaign to bolster its deposits by offering a higher interest rate on non- residents held by Indians living abroad. . Analysts believe other lenders could also follow suit with similar moves.

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As excess funds from the system are slowly removed by central bank action, banks’ margins and profitability could come under pressure, forcing them not only to raise deposit rates, but also eventually to turn to more expensive capital markets to raise the funds needed to meet the demand for credit.

This could worry investors, already on the back foot due to global factors, and push bank (.NSEBANK) stock prices further down.

Ratings agency ICRA said in a note last week that it expected banks to “aggressively begin chasing deposits, which will also lead to higher deposit rates.”

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Indian banks’ deposit growth (INDEP=ECI), currently at 9.8%, has remained in single digits for much of the past 14 months, while credit growth (INLOAN=ECI) – having bottomed out record 5.6% in FY21 – almost tripled to 14.4% in the fortnight to July 1.

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Personal loan growth, 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 larger report. early this week.

Going forward, as the outlook for credit growth looks bright, high inflation and rate hikes could cast a shadow, CARE said.

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Banks’ credit-to-deposit ratio – currently 73% of banks’ total deposits are on loan – has steadily increased, indicating that their earning capacity is also improving.

But as credit demand picks up, there could be pressure on funding unless deposit growth matches.

“In the next few months, if the trend continues, we will have no choice but to raise deposit rates because the market conditions are also not very favorable for us to go to the market to raise growth capital,” said a senior executive at a state-owned bank.

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Reporting by Nupur Anand and Swati Bhat; Editing by Simon Cameron-Moore

Our standards: The Thomson Reuters Trust Principles.

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