Banks Deposit Growth hits 50 year Low – Economists feel if the slowdown in Banks deposit growth continue, with a pick-up in credit demand, there could be pressure on rates.
Indian banks are facing a peculiar problem – banks deposit growth is at a five-decade low, and loan growth is beginning to get better after five years of fall – which is probably limiting the fall in borrowing costs as banks may be forced to increase deposit rates if demand for loans expand.
Banks are reducing the proportion of their government bond holdings to the total deposits as they begin to lend more than the previous years, data from the Reserve Bank of India shows. The so-called credit-to-deposit ratio has surged to 77.6% in March 2016, from 76.5% a year earlier, indicating that banks are lending a bigger portion of every Rs 100 taken as deposit. If the current trend continues, even government borrowings could get costlier.
As banks reduce the proportion of purchase of government bonds, yields on them could climb and consequently raise costs for even corporates. “Retail loans have been the largest contributor to bank credit growth in the past one-two years,” said Saugata Bhattacharya, chief economist Axis Bank.
“In the past couple of months, corporate working capital borrowings through commercial paper have partially reverted to banks (due to falling gap in their respective interest rates).” Deposit growth fell to 9.9% in the last reporting Friday of FY16, from 10.7% a year ago, RBI data shows. But loans grew 11.3% in the last Friday of March, from 9% a year ago. Deposit growth rate is the lowest since 1962-63. While loans growth has reversed, the five year trend in slowing down.
Economists feel if the slowdown in Banks deposit rate continue, with a pick-up in credit demand, there could be pressure on rates. “This year, bank loan growth may improve modestly, but if deposits do not grow commensurately, the funding mismatch may impede rate transmission,” said Bhattacharya.
Source: Economic Times