From advertisements to phone calls, banks have taken aggressive measures to promote loans in the past. However, recent data suggests that they may now have to garner attention of people to deposit money in the services they provide.
According to the recently released Centre For Monitoring Indian Economy (CMIE) data, banks’ credit demand touched an all-time high in 2022-23, posting a 15 per cent year on year growth. While the credit demand rose at a strong pace, deposits on the other hand lagged behind. The data shows that deposits grew by 9 per cent during the above-mentioned period. Outstanding credit-deposit ratio was 75.8 per cent in 2022-23. As a result of this trend, banks had to resort to other avenues of raising funds like certificate of deposits and issuance of debt in the primary market to meet the high credit demand.
Going forward, experts suggest that if the credit demand continues to grow at a strong pace, banks will need to make deposits attractive to meet their funds demand. This could translate into an increase in savings and fixed deposit rates.
Rising Credit Demand
Aniket Dani, Director of Research at CRISIL Market Intelligence and Analytics, says that the high demand in loans has been led by services sector. “The major reason behind the increase in credit demand by services enterprises is the economic recovery we are seeing in the past year.”
A look at RBI’s sectoral deployment of bank credit data shows that in April 2023, year-on-year credit growth to services sector was 21.6 per cent, compared to 11.9 per cent in April 2022. Notably, growth in services sector loans was the highest among all the other sectors mentioned in RBI’s report.
Suman Chowdhury, Chief Economist and Head of Research at Acuité Ratings & Research, says that working capital requirement of enterprises increased in the last one year due to recovery in consumer demand. “Along with this, another reason for increase in working capital requirement was a rise in the prices of commodities due to inflation.”
Due to pandemic induced supply chain issues and Russia-Ukraine war, inflation picked up globally in the last one year which forced several central banks to raise their interest rates. In India, Reserve Bank Of India raised repo rate by 250 basis points in the financial year 2022-23.
As the demand for credit increased in the last one year, banks remained as a solid option for raising funds. According to CMIE data, services enterprises raised most of their funds from banks in 2022-23, a break from the past as earlier they mostly relied on primary capital market.
One of the reasons why bank loans are emerging as an attractive option is because they didn’t completely pass on the hikes in interest rate by RBI, Chowdhury says. He adds that due to this, loans were available at a reasonable rate which has spurred credit demand from banks.
To meet credit demand, one of the major sources of funds for banks is deposits. However, from the CMIE data, it is clear that the growth in deposits did not keep up with the rise in credit demand. Dani argues that banks need to ensure that their CD ratio does not breach 77.5 per cent. He says that banks currently still have some room left to meet the credit demand.
Commenting on lagging deposits, Chowdhury says, “People have been exploring other financial instruments to get better returns. They have not found bank deposits to be an attractive option in this regard which could be one of the reasons why bank deposits growth is lagging behind.” Data available from reports suggest that demat accounts in the country increased by 25 million in the previous financial year.
With CMIE suggesting that credit demand is expected to be strong in the coming months, all eyes are now on banks to see how they will react.
Will Deposit Rates Rise?
Amid the strong credit demand, CMIE data suggests banks’ weighted average domestic term deposit rates (WADTDR) rose from 4.12 per cent to 6.48 per cent in March 2023. Analysts feel that if the credit demand remains strong, banks will need to react further by increasing deposit rates.
Dani says, “If opportunity cost in other avenues of investment is high, then banks will increase deposit rates to garner deposits in the coming months.” This can possibly lead to an increase in savings and fixed deposit rates.
Chowdhury suggests that while banks will be forced to increase deposit rates in the future, they received a short-term relief due to an RBI decision last month. “The withdrawal of Rs 2000 notes came as an interesting development for banks. As the central bank gave people option to deposit the notes straight into their bank accounts, banks have received a short-term boost in liquidity.”
An analysis by SBI Research predicts that out of Rs 3.62 lakh crore worth of Rs 2000 notes in circulation till March 2023, 85 per cent of such notes could be deposited in bank accounts. It says that this might help in “keeping banks ready to meet funding needs from diverse sectors”.
However, Chowdhury feels that this is only a short-term reprieve. He says that banks ultimately will have to increase deposit rates to attract deposits which will help them in meeting the growing credit demand in the country.
