Credit-deposit growth gap widens to a three-year high of nearly 5%

Development fuels concern that slow deposit growth could emerge as one of the biggest constraints for loan growth in the system

While credit growth in the system has picked up, deposit growth has not kept pace with credit growth, resulting in a widening of the gap to an over three-year high, thus exacerbating concerns that slow deposit growth could emerge as one of the biggest constraints for loan growth in the system.

According to the latest Reserve Bank of India (RBI) data, credit growth in the system for the fortnight ended June 17 was 13.2 per cent and deposit growth was 8.3 per cent--a gap of 490 basis points.

“…our biggest concern is that the gap between deposit growth and loan growth is widening and is at a three-year high. We think deposit growth will be the biggest constraint for loan growth for the system”, said Suresh Ganapathy and Param Subramanian of Macquarie Research.

Credit offtake in the system has been quite robust the past few months due to several factors, including better utilisation of working capital limits by companies; robust growth in housing and consumption loans; and corporations taking the bank route to fund their projects instead of short-term paper because of hardening of rates there.

As per the latest credit sectoral deployment data, retail credit grew 16.4 per cent; credit to services sector grew 12.9 per cent; agri portfolio saw 11.8 per cent growth; and industry sector witnessed 8.7 per cent growth.

Anil Gupta, VP – Financial Sector Ratings, ICRA, said, “While deposits grew by 8.3 per cent, net of Cash Reserve Ratio (CRR), statutory liquidity ratio (SLR), the lendable deposits from the incremental deposits sourced by the banks is even lesser. The widening gap between credit and deposit growth indicates that surplus liquidity in the system is reducing and eventually we may see tighter liquidity conditions going ahead”.

Banking system surplus liquidity dropped significantly, from Rs 4.57 trillion in April end to Rs 3.5 trillion in early July.

“Also, certificate of deposits has seen growth which is also pushing up the deposit growth. Sans the growth in certificate of deposits, the deposit growth would be sub 8 per cent”, he added.

The sluggish growth in deposits may compel banks to raise the rates.

“As liquidity comes down in the system, we could see upward pressure on the liabilities side of the banks to fund the credit off-take in the system,” Prakash Agarwal, director and head, (financial institutions), India Ratings.

“Thus, banks may have to compete against each other to mobilise deposits by increasing the deposit rates. The downside to this is banks may see contraction in their margins, given a large part of the loan book is linked to external benchmarks. However, at this point in time the credit – deposit is moderate. If the problem persists then we could also see some impact on banks’ ALM”, Agarwal said.

While the six-member monetary policy committee (MPC) has increased the benchmark policy rate, the repo rate, by 90 basis points since May, resulting in banks increasing interest rates on their external benchmark linked loans by the same proportion, the increase in deposits rates have not been commensurate with the increase in lending rates.

In the last monetary policy meeting, Governor Shaktikanta Das had indicated that the deposit rate will move up. “Normally the transmission takes time. We just announced the rate hike one month ago. It will take about two to three months for transmission. We do expect rate hikes to be transmitted to the liabilities side, viz. deposits. The bank deposit rates are going up. In any case when there is credit offtake, banks need to mobilise greater resources by way of offering higher deposit rates to savers”, he had said.