The usual year-end scramble for deposits by banks turned into a mad rush this year, with Rs 2 lakh crore flowing into the banking system in the last week of March. This was the highest flow in at least five years (see chart).
This helped deposits rise to Rs 9 lakh crore, compared to Rs 6.5 lakh crore in the previous financial year. Year-on-year deposit growth, which fell to 13.4 per cent just a fortnight back, shot up to 17.4 per cent as on March 30, data released by the Reserve Bank of India (RBI) showed. Bankers, however, said this was only a temporary phenomenon and the deposit base would come down sharply in April. RBI’s projected deposit growth for 2011-12 was 17 per cent.
Meeting yearly targets, especially by public sector banks, led to this mad rush for deposits, but came at a very high cost. The rate on three-month certificate of deposits in the last week of March went up to 11.75 per cent – which is 150-200 bps higher than what it was a month back. Banks fear the high cost of deposits would dent their margins.
“This is the likely impact of banks rushing to meet financial year-end targets. The skewed credit-deposit ratio and tight liquidity conditions have compelled banks to aggressively mobilise deposits towards the end of the year, but at a relatively high cost,” Sajjid Chinoy, India economist, JPMorgan, said. Credit-deposit ratio for the banking sector was at 77 per cent as of March-end, compared to 75.68 per cent a year ago.
Banks recorded a loan growth of Rs 93,000 crore in the last week of March, resulting in a year-on-year loan growth of 19.3 per cent higher than RBI’s projection of 16 per cent.
An analyst with a domestic brokerage said this jump in high-cost deposits would have an impact on margins, as there was no such spurt in credit growth. He said: “Even if there was, banks would not have been able to price their assets as aggressively. Earlier, the expectation was banks might report 20 bps lower net interest margins compared to last year. But, now the impact would be 20-30 bps.”
In a recent meeting with RBI, some bankers had raised the issue of the year-end spike phenomenon and suggested such aggressive pricing to bloat top line was not a healthy practice and needed to be discontinued. But RBI is unlikely to prescribe any cap on rates.
According to bankers, deposit mobilisation was sluggish during the year, as inflation stayed high, turning real return to depositors negative. And, the situation is unlikely to change anytime soon.
“We expect 2012-13 to resemble the latter half of 2011-12. With RBI signalling a reversal in the policy rate cycle, deposit rates are also likely to soften, leading to a subdued deposit growth. However, given that we expect only limited monetary policy easing, a significant drop in deposits is unlikely,” said Samiran Chakraborty and Nagaraj Kulkarni, economists at Standard Chartered Bank. The economists expect deposit growth in the range of 14-15 per cent in the current financial year.