Credit growth in India hit a three-year high and is expected to rise further as economic activity gains traction, but much slower deposit growth could prompt banks to seek funding and raise interest rates. deposit quickly, analysts and bankers said.
Deposit growth has taken a hit as high inflation led to lower savings and depositors preferred to invest their money in stocks and mutual funds in search of better returns, said Madan Sabnavis, chief economist at public lenders Bank of America. Baroda.
In a bid to boost deposit growth, the country’s largest private lender, HDFC Bank, launched a short-term campaign to boost its deposits by offering a higher interest rate on non-resident accounts of Indians living abroad. Analysts believe other lenders may follow suit with similar moves.
As excess funds are slowly drained from the system by central bank action, banks’ margins and profitability could come under pressure, forcing them not only to raise rates on deposits but also to eventually resort to more expensive capital markets to help the necessary funds to increase the demand for credit.
That could worry investors, already lagging behind due to global factors, and send bank share prices lower still.
Credit rating agency ICRA said in a statement last week that it expects banks to “start aggressively seeking deposits, which will also lead to higher interest rates on deposits.”
Indian Bank Deposit Growth
India’s bank deposit growth, currently 9.8%, has been in the single digits for most of the past 14 months, while loan growth, after hitting a record low of 5 .6% in the last FY21, has moderated in the two weeks to January 1 tripled to 14.4%.
Indian Bank Credit Growth
The growth of personal loans, which includes personal loans, mortgages, and auto loans, has steadily accelerated and continues to outpace business loans.
“Retail lending has been the main driver of growth in the Indian banking sector in recent years as corporate lending has stalled due to NPAs (distressed assets) and deleveraging,” CARE Ratings said in a statement in an important report earlier this week.
With the outlook for credit growth looking good going forward, high inflation and rate hikes could be overshadowed, CARE said.
Sectoral credit growth in India
Banks’ loan-to-deposit ratios, currently slowing at 73% of total bank deposits, have been rising steadily, suggesting their profitability is also improving.
But if credit demand rises, funding could come under pressure unless deposit growth matches.
“If the trend continues over the next few months, we will have no choice but to raise deposit rates because market conditions are also not very favorable for going to the market to raise growth capital,” said an executive at a state-owned bank.