The Banking Balancing Act: Navigating Credit and Deposits in a Shifting Landscape
November 29, 2024, 10:29 am
In the world of banking, numbers tell a story. The latest data reveals a tightening gap between credit and deposit growth in India. This shift, a mere 90 basis points in September, is a significant change from the 330 basis points seen just a few months prior. It’s a signal that the Reserve Bank of India (RBI) is making headway in its efforts to manage risk in the financial system.
The RBI's decision to increase risk weights on unsecured consumer credit and loans to non-banking finance companies (NBFCs) is beginning to bear fruit. This move aimed to curb excessive credit growth, particularly in unsecured segments. As a result, bank credit growth moderated to 12.6% year-on-year in September, down from 15% in June. Meanwhile, deposits held steady at 11.7% growth. This balancing act is crucial for maintaining financial stability.
The narrowing gap indicates that banks may ease their aggressive strategies to attract funds through certificates of deposits (CDs). The issuance of CDs surged by 57% year-on-year, reaching ₹6.01 lakh crore in the current fiscal year. This frantic pace was driven by the need to support credit growth. However, as credit growth softens, the urgency to issue CDs may diminish.
Public sector banks (PSBs) and private sector banks (PVBs) hold significant shares in the credit market, with 53.2% and 41.8%, respectively. In September, PSBs recorded a 13% increase in credit, while PVBs saw an 11.9% rise. Yet, the metropolitan branches, which account for a large portion of loans, experienced a slowdown, growing only 11.6%.
Diving deeper into the sectors, agriculture, industry, housing, and personal loans showed varied growth rates. Credit to the private corporate sector outpaced overall credit growth, reaching 16.5% year-on-year. Working capital loans also gained momentum, climbing to 15.3%. This indicates a robust demand for credit in the corporate sector, even as overall growth moderates.
On the deposit side, a notable shift is occurring. Higher interest rates are attracting deposits into term accounts. The share of term deposits offering over 7% interest surged to 68.8% in September, up from 54.7% a year ago. This trend suggests that savers are seeking better returns, leading to a decline in current account and savings account (CASA) deposits. The share of CASA deposits fell to 61.4% from 59.8% in the same period.
Interestingly, deposits from senior citizens increased to 20.1%, reflecting a demographic shift in savings behavior. As interest rates rise, older savers are likely looking for stable, higher-yielding options.
However, the banking landscape is not without its challenges. Recent foreign portfolio investor (FPI) selling in Indian markets has triggered a ripple effect on bank deposits. In the fortnight ending November 15, 2024, deposits plummeted by ₹1,73,581 crore. This decline coincided with a significant drop in the BSE Sensex, which fell by over 2,144 points during the same period.
The outflow of deposits may be linked to mutual funds facing redemption pressures due to market declines. As investors pull back, banks experience liquidity squeezes, prompting the RBI to conduct variable rate repo auctions to inject liquidity into the system. This response highlights the interconnectedness of the banking sector and the broader financial markets.
In the preceding fortnight, bank advances had surged by ₹2,08,748 crore, only to drop by ₹73,348 crore in the latest reporting period. This fluctuation is typical, as many loans carry interest at monthly rests, leading to a spike in advances at month-end. The cycle of salary and pension credits also plays a role, as government funds are released at the end of the month, affecting liquidity.
The decline in outstanding investments in government securities further illustrates the tightening grip on liquidity. As deposits dwindle, banks may find themselves in a precarious position, balancing the need for credit growth with the realities of a shifting market.
In conclusion, the banking sector is navigating a complex landscape. The narrowing gap between credit and deposit growth reflects the RBI's efforts to manage risk and stabilize the financial system. However, external pressures, such as FPI selling and market volatility, pose challenges that could impact liquidity and overall banking health. As banks adjust their strategies, the focus will remain on maintaining a delicate balance between attracting deposits and supporting credit growth. The road ahead may be bumpy, but with careful navigation, the banking sector can emerge resilient.
The RBI's decision to increase risk weights on unsecured consumer credit and loans to non-banking finance companies (NBFCs) is beginning to bear fruit. This move aimed to curb excessive credit growth, particularly in unsecured segments. As a result, bank credit growth moderated to 12.6% year-on-year in September, down from 15% in June. Meanwhile, deposits held steady at 11.7% growth. This balancing act is crucial for maintaining financial stability.
The narrowing gap indicates that banks may ease their aggressive strategies to attract funds through certificates of deposits (CDs). The issuance of CDs surged by 57% year-on-year, reaching ₹6.01 lakh crore in the current fiscal year. This frantic pace was driven by the need to support credit growth. However, as credit growth softens, the urgency to issue CDs may diminish.
Public sector banks (PSBs) and private sector banks (PVBs) hold significant shares in the credit market, with 53.2% and 41.8%, respectively. In September, PSBs recorded a 13% increase in credit, while PVBs saw an 11.9% rise. Yet, the metropolitan branches, which account for a large portion of loans, experienced a slowdown, growing only 11.6%.
Diving deeper into the sectors, agriculture, industry, housing, and personal loans showed varied growth rates. Credit to the private corporate sector outpaced overall credit growth, reaching 16.5% year-on-year. Working capital loans also gained momentum, climbing to 15.3%. This indicates a robust demand for credit in the corporate sector, even as overall growth moderates.
On the deposit side, a notable shift is occurring. Higher interest rates are attracting deposits into term accounts. The share of term deposits offering over 7% interest surged to 68.8% in September, up from 54.7% a year ago. This trend suggests that savers are seeking better returns, leading to a decline in current account and savings account (CASA) deposits. The share of CASA deposits fell to 61.4% from 59.8% in the same period.
Interestingly, deposits from senior citizens increased to 20.1%, reflecting a demographic shift in savings behavior. As interest rates rise, older savers are likely looking for stable, higher-yielding options.
However, the banking landscape is not without its challenges. Recent foreign portfolio investor (FPI) selling in Indian markets has triggered a ripple effect on bank deposits. In the fortnight ending November 15, 2024, deposits plummeted by ₹1,73,581 crore. This decline coincided with a significant drop in the BSE Sensex, which fell by over 2,144 points during the same period.
The outflow of deposits may be linked to mutual funds facing redemption pressures due to market declines. As investors pull back, banks experience liquidity squeezes, prompting the RBI to conduct variable rate repo auctions to inject liquidity into the system. This response highlights the interconnectedness of the banking sector and the broader financial markets.
In the preceding fortnight, bank advances had surged by ₹2,08,748 crore, only to drop by ₹73,348 crore in the latest reporting period. This fluctuation is typical, as many loans carry interest at monthly rests, leading to a spike in advances at month-end. The cycle of salary and pension credits also plays a role, as government funds are released at the end of the month, affecting liquidity.
The decline in outstanding investments in government securities further illustrates the tightening grip on liquidity. As deposits dwindle, banks may find themselves in a precarious position, balancing the need for credit growth with the realities of a shifting market.
In conclusion, the banking sector is navigating a complex landscape. The narrowing gap between credit and deposit growth reflects the RBI's efforts to manage risk and stabilize the financial system. However, external pressures, such as FPI selling and market volatility, pose challenges that could impact liquidity and overall banking health. As banks adjust their strategies, the focus will remain on maintaining a delicate balance between attracting deposits and supporting credit growth. The road ahead may be bumpy, but with careful navigation, the banking sector can emerge resilient.