“Whereas the hole between deposit and credit score development has narrowed from the height of 8.8% in November 2022 to three.5% at the moment, the excessive incremental LDR and continued regulatory watch on each LDR and liquidity protection ratios (LCR) will drive additional moderation in mortgage development,” mentioned Nitin Aggarwal, Institutional Analysis – Head BFSI, Motilal Oswal Securities. “We estimate the differential between credit score and deposit development to slender all the way down to lower than 100 foundation factors over the yr.”
The LDR assesses a financial institution’s liquidity by evaluating complete loans to complete deposits, with a excessive LDR indicating potential liquidity points. Indian banks’ deposit development has largely remained gradual as financial savings are shifting in the direction of various avenues like mutual funds, fairness investments, and actual property.
For the big a part of the yr banks’ loan-to-deposit ratio has stayed above 80%, a quantity that the Reserve Financial institution of India isn’t comfy with as these establishments are additionally required to carry 18% of liabilities in authorities securities and keep 4.5% as money reserves.
“Regardless of regulatory efforts to cut back the excessive credit-deposit (CD) ratio, banks have continued to develop credit score at the same time as deposit development has slowed,” Aggarwal mentioned. “The excellent CD ratio stays elevated at 79.1%, indicating banks’ must focus extra on growing their deposit base. Banks are anticipated to face tighter competitors in deposit charges and will gradual credit score development to handle the excessive CD ratio.”
The incremental CD ratio reached 113% on the finish of the final fiscal yr, primarily led by public sector banks who operated on an incremental CD ratio of greater than 100%. In response to Motilal Oswal report, public sector banks have benefited from this development as their excellent CD ratios have remained decrease, offering extra room to increase. The brokerage home estimates that with the CD ratio already excessive and restricted choices to squeeze SLR and LCR to fund credit score development, banks are prone to shift their focus to growing deposits.”The emphasis on deposit development might result in increased funding prices, probably impacting the banks’ margin trajectories,” the report mentioned.