Banking News

credit demand: Deposit rates unlikely to rise with soaring credit demand


Kolkata: A fresh deposit war is most unlikely even as banks are gearing up to meet higher credit demand in the coming festive season, with a majority of lenders looking to avoid raising deposit rates to protect their margins.

They may instead use the excess liquidity buffer maintained in the form of statutory liquidity ratio (SLR) to bridge any short-term funding mismatches, captains of the banking industry said.

“No thought of increasing the deposit rate at this moment… We have excess SLR in our system, if necessary, to support our credit growth,” Canara Bank MD Satyanaraya Raju said.

A senior executive at the Bank of Maharashtra shared Raju’s views, even as Punjab National Bank raised rates last week.
The phased withdrawal of the incremental cash reserve ratio (ICRR) between September 9 and October 7 would help banks to meet the festive credit credit demand, top bank executives said. “Our call on deposit rates remains neutral to softening in the medium term. The impact of the withdrawal of ICRR will make around ₹1 lakh crore available to the banking system in a phased manner which will reduce the short-term rates up to one year. The deposit rates on 3-5-year term would remain stable in the medium term,” said CSB Bank managing director Pralay Mondal. “We would not prefer to use SLR to fund credit growth, it can only be used to bridge short-term funding mismatches,” he added. There was some strain in the sectoral liquidity due to the absorption of surplus liquidity through the incremental cash reserve ratio (ICRR). Plus, credit growth has been outpacing deposit growth over a long period on a sectoral level and the trend may continue. Bank credit grew by 14.9% year-on-year at the end of August 25 while comparable deposit growth was seen at 12.3%. This excluded the impact of the merger between HDFC and HDFC Bank.

“Currently, liquidity in the system is a bit tight, but with the RBI’s mandate of phasing out of the incremental CRR over the next month, the pressure will ease a bit,” Bandhan Bank’s managing director Chandra Shekhar Ghosh said. “We will carefully look at the data on the festive season demand and also the guidance from the RBI in the next monetary policy meeting in October,” he added.

Meanwhile, banks’ cost of deposits has hit an upward trajectory, largely owing to the lagged impact of past deposit rate hikes, putting pressure on net interest margins (NIM).

State Bank of India, the country’s largest lender saw its NIM dipping 27 basis points to 3.3% at the end of June against what it was three months prior to that. Bank of Baroda’s NIM fell 26 bps sequentially to 3.27% with Canara Bank’s NIM falling 25 bps to 2.78%, probably enough to dissuade these banks from further deposit rate rises.


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