Credit growth cools as banks come to terms with the new normal

While the Reserve Bank of India has been warning against unprecedented growth in certain lending buckets, banks have been reluctant to slow down given the strong demand for credit and healthy portfolio quality.

However, the pressure on margins owing to the cumulative impact of elevated deposit rates for a prolonged period and consistently falling share of low-cost deposits are now pushing banks to go slower on lending to align credit growth with the pace of the rise in deposits.

Axis Bank Ltd’s chief executive Amitabh Chaudhry said during the company’s recent earnings call that credit growth is now expected to converge with the level of deposit growth—of about 13%—in 2024-25.

Sequential loan growth for banks that have reported first-quarter results so far was in the range of 0.7-5.4%. In comparison, deposit growth was a mixed bag, with several banks seeing a contraction of up to 2% while a few others saw a growth of as much as 5.4%.

Also read |If deposits are stuttering, how will banks manage the credit boom?

CareEdge Ratings said in a report that credit and deposit inflows over the past three and six months showed that incremental credit offtake has lagged deposit growth.

The credit-to-deposit ratio from January is about 70%, and from March, about 54%, CareEdge stated, adding that bank credit offtake could “face challenges and is likely to be tepid for the year".

To be sure, deposit growth still trails credit growth amid a structural shift in savings habits in favour of higher-yielding options. As of 12 July, bank deposits were up 11.3% year-on-year, up from a 11.1% rise in the preceding fortnight. But growth in loans had slowed to 14% from 17.4% as of June-end.

Hurting margins

A robust CASA ratio is crucial for banks and signifies access to funds at lower cost—essential to offer competitive loan rates while maintaining healthy interest margins.

The share of low-cost current and savings accounts deposits for most banks that have declared their fiscal first-quarter results has fallen by up to six percentage points year-on-year, and by three percentage points sequentially, to 29-43% as of 30 June. One percentage point equals 100 basis points (bps).

State Bank of India managing director Ashwini Kumar Tewari said last week that though the system-level CASA ratio is about 40%, the actual share of low-cost deposits with banks is just over 30%, considering the sweep facilities (where funds are automatically transferred from one account to another) and high savings rates on certain deposits.

This, he added, puts pressure on banks to meet their funding requirements.

While current account deposits do not offer interest, lenders have increased rates on certain high-value savings accounts and fixed deposits. As a result, the cost of deposits for banks increased by 4-5 bps on-year to 4.8-6.5% in the June quarter, impacting margins.

Also read |Mint Explainer: Why private banks cannot ignore their CASA growth challenges

Reserve Bank of India governor Shaktikanta Das recently said that slower growth in deposits,the worst in about two decades, relative to credit expansion could “expose the system to structural liquidity issues".

“The current regulatory concern stems from the fact that there could be structural changes happening which banks need to recognise and, accordingly, devise their strategies," Das said, adding that this necessitates continuous improvement in credit underwriting standards and risk pricing.

Das said the increased reliance on alternative funding sources such as short-term borrowings and certificates of deposit makes banks more sensitive to interest rate fluctuations and complicates liquidity risk management.

Cost of deposit dilemma

As of 28 June, bank deposits were up 11.1% year-on-year, lower than the 17.4% growth in credit. A significant portion of the deposit growth was driven by time or fixed deposits, reflecting customers' preference for higher-yielding investments.

“It is customer first and the customer’s choice. You cannot swim against the tide. If a customer wants higher returns, it is but logical," said Shanti Ekambaram, deputy managing director of Kotak Mahindra Bank Ltd. “They are not only putting money into MFs (mutual funds) but are also going to term deposits. We are seeing a big rise in the banking segment term deposits."

Also read |Large banks see deposit, credit slow down from March, smaller peers better off

Systemic liquidity conditions have also affected recent deposit dynamics. HDFC Bank Ltd’s chief financial officer, Srinivasan Vaidyanathan, said tight liquidity conditions coupled with a “cyclical" rundown in current account balances as businesses utilised their funds, contributed to tempered deposit growth during the first quarter.

However, there was also a marked shift in customer behaviour, with HDFC Bank’s time deposits growing 24% year-on-year and 3% quarter-on-quarter, indicating a shift towards higher returns.

Axis Bank’s chief financial officer, Puneet Sharma, acknowledged that while conditions might improve as government spending increases, the bank will need to “stay competitive as far as rates are concerned".

A war for deposits

In addition to offering higher rates, banks are looking to overcome the deposit crunch through other ways. While HDFC Bank and Federal Bank said the focus remains on granular deposit accretion through branch expansion, Kotak Bank has been highlighting its short-tenure savings product ‘ActivMoney’, which offers rates that are higher than savings accounts but lower than term deposits.

Also read |Borrowers are paying the price for banks chasing deposit growth

Federal Bank reported good growth in deposits by non-resident Indians in the first quarter, following several initiatives. NRI deposits for the bank increased by 9% year-on-year and 1.5-2% quarter-on-quarter.

“People are using their money more judiciously, but banks and bankers must figure out how to serve and price better, gain customer consideration, and market share. The structural story of how people engage with money is changing right under our noses," said Shyam Srinivasan, CEO of Federal Bank, while announcing the bank’s results.

“The war for deposits as we knew it in the years gone by will certainly be there."

Also read |It is easier than ever for Indians to borrow now. So why aren't they spending more?