Banks' deposit growth betters credit growth

The Reserve Bank of India (RBI) data released on Wednesday showed that deposit growth in banks continued to be more impressive than credit growth in the current financial year. Bank deposits grew Rs 61,701 crore in the period between June 29 and September 21, 2012 on a year-on-year basis, according to the RBI data. Outstanding credit grew Rs 5,642 crore during the same period. During April 6 and September 21 of the current financial year, deposits were up by Rs 1,95,839 crore, while credit was up by Rs 72,923 crore.

One reason for the growth in deposit is that risk-averse investors opted to park their money in bank deposits, despite falling rates. The dip in credit growth could be attributed to the fact that high lending rates are still pinching the borrowers.

“Credit growth is slow because corporates are still finding the base rates of banks high. They prefer borrowing from the market by way of instruments like commercial papers, etc,” said B A Prabhakar, chairman and managing director, Andhra Bank.

Several banks including the State Bank of India (SBI), ICICI Bank and HDFC Bank lowered deposit rates to protect margin erosion. However, following the 25 basis points (bps) cut in the cash reserve ratio (CRR) by the RBI last month, SBI was the only bank to lower its base rate by 25 basis points to 9.75 per cent. CRR is the proportion of total deposits a bank has to keep with RBI as cash, which currently stands at 4.5 per cent of banks’ net demand and time liabilities (NDTL).

Other banks are looking for cues from the RBI on repo rate cut. Repo is the rate at which banks borrow from the central bank. In the current fiscal, the RBI has cut the repo rate only once by 50 bps to 8 per cent. Another cut will depend on inflation coming under control.

This festive season, banks are relying on retail credit and with this in mind, they have launched various schemes with reduced interest rates and processing fees. Many bankers expect the second half of the fiscal to be far better.

According to Prabhakar, the second half will be better and RBI’s mandate of 17 per cent credit growth for the current fiscal will be achieved. Abraham Chacko, executive director, Federal Bank concurred, “The second half has always been better in terms of credit growth. The festival season will drive retail credit and government’s bold decision will drive corporate credit growth. Further, drop in interest rates will also boost credit demand.”