Bank deposit mop-up at historic low

On an average, the Reserve Bank of India (RBI) has been sucking out in excess of Rs 50,000 crore from the banking system through its reverse repo window over the last one month.

If this suggests that commercial banks have too much in their kitty to lend, think again. The RBI has been absorbing short-term liquidity, even as the commercial banks continue to reel under a resource crunch, thanks to a historic low mobilisation of deposits.

The increase in bank deposits has been just Rs 27,214 crore since the beginning of the new financial year "" between April 1 and May 26 "" against an accretion of Rs 78,671 crore during the corresponding period in 2005.

In fact, the banking sector is witnessing the lowest increase in deposits in a decade. The addition to deposits in the financial year so far has been just 1.3 per cent, against 4.6 per cent last year and 3 per cent in 2004.

"Banks are in a false liquidity comfort zone because of contraction in credit. The outstanding bank credit has fallen by Rs 13,962 crore in the April 1-May 26 period, against an increase of Rs 40,644 crore in 2005. Once bank credit starts picking up in the busy season beginning October, banks will be in a tight spot," said the CEO of a large public sector bank.

Another senior banker said corporations had been parking excess funds with banks extracting higher interest rates, but retail deposits were not forthcoming.

"We are offering 7 per cent for over 3-year deposits, but still there are hardly any takers," he said. As a result of this, no bank was lending long-term money at below 9 per cent.

Banking analysts said the trend might change with the stock market turning volatile. "If the market continues to remain volatile, the investors may look for a safe haven and return to the bank fold," said an analyst.

The accretion in term deposits since March 31, 2006, has been slower compared to the same period last year. Banks are feeling the pinch of a decline in the savings and current account (CASA) balances.

The outstanding CASA or demand deposits have declined by Rs 33,196 crore since April 1, 2006, against an increase of Rs 5,524 crore last year.

The addition to term deposits since April 1, 2006, was Rs 60,409 crore, against Rs 73,147 crore in the same period last year.