Banks face challenges in deposit accretion while maintaining margins, says India Ratings

Mumbai: Indian banks face an uphill task of mobilising deposits while minimising the impact on margins, apart from setting aside additional provisions on account of the proposed transition to the expected credit loss (ECL) model, rating agency India Ratings and Research said on Wednesday.

“Deposit repricing will continue to happen in a competitive environment especially as banks have drawn on almost 5 trillion of liquidity since March 2022 that has enabled reasonably priced and evenly paced deposit mobilisation,” it said in a statement.

The rating agency said that as banks grow their books at higher rates than seen in the preceding five to seven years, some of the improvements in low-cost deposits could reverse especially for public sector banks. The agency expects continued strong system-level credit growth-18.8% y-o-y in Q3 FY23–to continue to outpace deposit growth–11.3% y-o-y–which will keep pushing up deposit rates in the near term and increase competition among banks to grow their deposits franchise.

While the repo rates have gone up by 250 basis points (bps) since May 2022, deposit rates have increased risen only 150-200 bps, which implies that the transmission will continue in the near term. It added that banks are still offering highest interest rates on deposits with tenors of one to three years, reflecting the requirements of asset-liability management along with the unwillingness to offer tenor premium to lock-in longer tenor deposits.

“Banks are also resorting to using wholesale deposits including bulk deposits opportunistically to meet the demand for lending. The level of outstanding certificates of deposits (CDs) in the system at 2.8 trillion is up 2.8 times y-o-y,” it said.

According to India Ratings, even the share of CDs in the overall term deposit profile of banks has shown a sharp uptick. In the recent past, the agency said it has seen almost 100 bps difference between the rates at which banks have raised one-year CDs versus their one-year term deposit rates, indicating the potential for a further increase in term deposit rates in the near term.

“The real interest rate, as indicated by G-sec rates less inflation, holds a direct correlation to the deposit multiplier. Considering Ind-Ra’s estimates for macro variables, the deposit growth for FY24 could be 9-11% ceteris paribus and may act as a limiting factor for advances growth,” it said.

With a rising interest rate environment and persistent inflation, the Reserve Bank of India remains in withdrawal of accommodation mode and India Ratings said, this and a high base effect, would mean that banking system credit would grow at 13.5% y-o-y in FY24, down from 15% in FY23.

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