Banks Brace For Struggle To Raise Deposits As Economy Turns

Jobs and incomes are growing slowly. Consumers are spending more, saving less. Businesses are borrowing more. Interest rates are rising faster on loans than on deposits. A combination of these factors has meant that banks are fearing a scramble for deposits after a gap of at least a few years.

Over the last few years, loan demand has outstripped the inflow of deposits, leaving banks with plenty of surplus funds. This has now turned with credit growing faster than deposits. If the trend persists, it could force banks to push up the interest rate offered to depositors, which are currently offering less than the rate of inflation.

During the pandemic, deposits were coming in as people were not spending much, said Shivan JK, chief executive officer at Dhanlaxmi Bank. Now, people are spending and everything is more expensive, Shivan said. "The struggle to get deposits is real and every bank is feeling the pinch," he said.

Deposits have slowed this quarter after showing strong growth during the pandemic, whereas credit growth was slowing for the past two years and is only now picking up, said Ashutosh Khajuria, executive director at Federal Bank. As a result, lenders are now looking at an asset liability mismatch, he said.

Bank credit grew by over 12% year-on-year for the week ended June 17, 2022, the highest in at least three years and nearly twice the growth rate of 5.8% for the same week last year. In contrast, bank deposits grew at 8.3%, according to RBI data. This was also lower than a growth rate of 10.65% at this time last year.

Credit growth has outstripped deposit growth since April, the data shows.

On an incremental basis as well, while credit disbursed rose by Rs 5.66 lakh crore from January this year to June 17, fresh deposits rose Rs 3.28 lakh crore.

To be sure, the outstanding credit deposit ratio remains comfortable for now at close to 73%.

According to a 2019 study by the RBI, income is the most important determinant for deposit growth. Interest rates offered by banks, the substitutions effect between competing instruments such as small savings and the spread of bank branches are other factors that can impact deposits.

At present, while comprehensive data is not available, indicators suggest that employment growth and wage growth is weak.

"Wage growth is as slow as the growth in employment, so we are not doing better on wages," Mahesh Vyas, chief executive of the Centre For Monitoring Indian Economy told BQ Prime in a recent interview. "Households are taking a hit on both fronts—wages and employment," he said.

Two other factors may be playing a role in the sluggish deposit growth. First, the government has kept small savings rates high. Second, banks have been slow to raise deposit rates even though the central bank has raised the effective policy rate from 3.35% to 4.9%.

The weighted average deposit rate rose to 5.07% in May compared to 5.03% in April. The weighted average lending rate has risen to 8.79% from 8.72% over the same period.

Banks are behind the curve in re-pricing their liabilities side, Shivan said. "The rise in deposit rates should have been commensurate," he said. Unlike in the case of loans, deposit rate pass through can be a bit slower, said Khajuria.

Bankers and analysts expect that the wedge between credit growth and deposit growth will persist. This, together with a continued rise in the the benchmark policy rates, could mean higher interest rates for depositors over the next few months.

Deposit rates will rise over the next two months, said Khajuria. The extent of rate hikes may differ from lender to lender. "Banks have to look at their asset-liability mismatches and it takes time to pass on the rise in rates," Khajuria said. Besides as credit picks up, it creates its own deposits, albeit with a lag, he added.

Asutosh Mishra, head of research, institutional equity at Ashika Stock Broking said that private banks will face a bigger challenge in raising deposits. Smaller private banks, if seeing credit growth at the industry level of 12-13% could face challenges, depending on how much extra money they have parked in government securities over and above the required statutory liquidity ratio, he added.