BANKS DEPOSITS DILEMMA

Banks are caught in a bind, with deposit growth lagging behind credit growth, forcing them to offer higher rates to raise funds while competition and EBLR keep lending rates capped

Borrow at 3%, lend at 3% and be at golf course at 3 pm,’ goes the adage in the banking world. However, the dictum has been of late turned topsy-turvy for Indian banks.

After the respite from toxic loans that were brought to manageable levels through write-offs and government money infusion, Indian banks are now facing a deposit crunch that has crimped their ability to fund the huge credit demand that arose after the pandemic.

The scare of new trouble at banks has led to the finance minister and the Reserve Bank of India flagging the liability mismatch risks. The finance minister has even asked banks to start special drives to mobilize deposits.

WHAT'S THE ISSUE?

Indian banks are seeing a significant divergence between credit and deposit growth. As of 26th July ’24, the year-on-year bank credit growth stood at 13.7%, while deposit growth lagged at 10.6%. This disparity has pushed the credit-deposit ratio (CD), which measures how much of a bank’s deposits are being utilized for loans, to a record high of 80%, the highest since 2015, raising concerns about the sector’s liquidity and stability.

STRUGGLES TO ATTRACT DEPOSITS

Banks are struggling to raise deposits due to several factors such as customers gravitating towards high-return, equity-linked products, which offer better returns compared to traditional bank deposits. This has forced banks to offer higher rates on fixed deposits.

Also, the share of low-cost current and savings deposits (CASA) in total deposits is dropping. Customers lured by higher rates prefer to keep their excess funds in fixed deposits, which have been greatly facilitated by the swipe-in facilities that help in creating time deposits with just a click or a swipe and do not need visits to the bank branch.