Bank deposits, loan growth fall after year-end rush

The sharp year-end increase in deposits and advances of scheduled commercial banks reversed to some extent in the first week of this month, revealing the artificial boost given to meet annual targets.

Bank deposits that had risen by Rs 2 lakh crore towards the end of March dropped by about Rs 17,000 crore, dragging the annual rate of growth from 17 per cent to 14 per cent in the first week of the new financial year. Similarly, annual credit growth was down from 19.3 per cent to 18.73 per cent within a week.

“In order to meet year-end targets, banks requested their corporate clients to borrow for short tenures and deposit the funds in their current accounts. This way both credit and deposit growth can be jacked up for some time,” said a senior banker.

Typically, there is a spurt in the year-end figures but the significantly high volumes this time have become a cause for concern. “There is no real need for funds and banks borrow them at higher rates only to deploy at lower rates. In the central bank’s view, such a practice artificially pushes short-term rates up and poses systemic risks,” said a senior banker on condition of anonymity. “The top line phobia has to go.”

The rush to meet annual targets amid tight systemic liquidity had sent rates on short-term debt instruments above 11.75 per cent in the last week of March. At the end of the previous financial year, banks were able to register deposit growth of 17 per cent, as projected by the Reserve Bank of India (RBI).

In the Annual Monetary and Credit Policy, RBI asked banks to reduce interest rate distortion between bulk and retail deposits. RBI deputy governor K C Chakraborty said, “Banks are giving unduly high rates on bulk deposits.” He added that the practice needs to be discontinued.

A senior public sector banker said these high cost of funds will come in the way of monetary transmission. While RBI has reduced policy rate, banks may take time to respond with a similar quantum of cut in their base rates. “Cost of deposit will come down only when the bank gets equal amount of deposits at lower rates,” said the public sector bank official.

There may be further dip in deposits as banks shed unnecessary funds. The issuances of certificates of deposits have fallen on low demand from banks since the start of the new financial year. As a result, the rates on CDs fell by 100-150 basis points in the same period.