A video is doing the rounds of social media, showing an official of Canara Bank, a Public Sector Bank, selling fixed deposits like a hawker in the streets of Mumbai suburbs in order to build up bank deposits. He is trying to attract investors with an attractive return scheme to blow off steam. The video speaks for itself the story of liquidity crunch in the Indian banking system.
HDFC Bank, the largest private player in the country, has also started a short-term drive to strengthen its deposits by offering a higher rate of interest on non-resident accounts. Both Canara Bank and HDFC Bank are actually on the ball as the slow deposit growth against the double-digit growth is creating a liquidity crunch for banks.
However, we still cannot paint all banks with the same brush because private sector banks are performing really well. Their credit growth is at a healthy pace in the July-September quarter of the current financial year on a year-on-year basis and deposit growth is also picking up pace. State Bank of India, HDFC Bank, Yes Bank and IndusInd bank have registered double digit credit growth with a strong deposit growth. However, the overall picture of Scheduled Commercial Banks (SCBs) is more or less similar.
A slower deposit growth
During 2020 and 2021, deposits with SCBs grew at a higher pace than usual because banks are enjoying the status of safe havens. The aggregate deposit growth has remained in the range of 9.5-10.2% since the second quarter of 2021. Moreover, metropolitan branches secured more than half of the bank deposits. Subsequently, the share of current and saving account (CASA) deposits in total deposits have been inching up during the last three years. It has grown by 42.0% in June 2020, 43.8% in June 2021 and 44.5% in June of 2022.
However, high inflation resulting in small savings is now affecting deposit growth of banks. The annual deposit growth rate that was an average of 9.9% in 2019 increased to 10.8% in 2020, declining to an average growth of 10.5% in 2021. Deposit growth that reached an all-time high since September 2017 at 12.3% in March 2021, started declining and reached 9.5% in June 2022. It is expected that the same trend is likely to continue even in the upcoming quarters.
Madan Sabnavis, the chief economist at Bank of Baroda, hit the nail on the head when he said depositors are parking their funds (savings) into the capital market instruments like share, debenture/bonds and mutual funds in search of better returns. The migration of investors from banks to the stock market could further affect deposit growth of banks. In addition, the increasing inflation rate is also a matter of great concern. According to a working paper of the RBI, an increase in the households’ inflation expectations impacts households savings in debt-based instruments like bank term-deposits negatively.
A rise in credit growth
Credit growth of banks was floundering during the global Covid-19 pandemic period. The banking system was under severe stress. The country had been under a strict nation-wide lockdown for almost 69 days that was followed by unlocking 1.0, 2.0, 3.0 and 4.0 to save livelihoods. The result was that many businesses remained closed during complete lockdown and partially closed during the unlocking period, which resulted in a decline in credit demand from the businesses in all sectors. During the financial year 2020-21, all sectors — except agriculture, forestry and fishing and financial, real estate and professional services — registered negative growth.
Even during the third and fourth quarters of 2020 and the first and second quarters of 2021 demand for credit has sharply decreased against the pre-pandemic period. The average credit growth was at 11.7% in 2018, it decreased to 10.3% in 2019 and further decreased to 5.8% in 2020. However, it improved a little bit, and reached 6.8% in 2021.
The growth that was in double digit in June 2019 started to decline and reached an all-time low at 5.6% in March 2021. However, after that it accelerated gradually from the second quarter of 2021, standing at 8.4% as of December 2021, and moved to double digit at 10.8% in March 2022.
According to the latest issue of the Quarterly Statistics on Deposits and Credit of SCBs of the RBI, credit growth on a year-on-year basis stepped up to 14.2% in June 2022 against 6% a year back and expected to continue to be robust despite poor global macro headwinds and over-tighten monetary policy. The growth has been broad based as all the population groups, bank groups, and all the regions of the country accounted for double-digit annual credit growth.
High frequency indicators
India has weathered the economic shock of the global Covid-19 pandemic well. With fiscal support by the government and monetary support by the RBI, economic activities in the country are now gaining momentum. The quarterly data released by the Ministry of Statistics and Programme Implementation (MoSPI) showed the same. The Indian economy registered a growth of 13.5% at constant price in the first quarter of the financial year 2022-23 (Q1FY23).
This growth is 3.8% higher than the pre-pandemic level i.e. Q1FY20. Private consumption (PFCE), which accounted for a growth of 25.9% is a major indicator of increasing demand in the market. Gross fixed capital formation (GFCF) grew by 20.1% during the same period. It is, according to the RBI, a reflection in a sharp acceleration in proximate coincident indicators steel consumption, cement production and import of capital goods.
High frequency indicators (HFI), like passenger vehicle sales for urban demand, steel consumption and cement production for construction, manufacturing and services for PMI index, tractors sales for rural demand, and e-way bill, port cargo traffic, commercial vehicles sales, railway freight traffic for trade hotel transport, are indicating moderation in economic activities amidst slowing global economy and steep rise in inflation.
With the moderation in HFI, credit growth is outpacing deposit growth in the recent past and it has been on the rise. Credit-deposit (C/D) ratio has been getting off to a flying start. C/D ratio has jumped to 73.5% at all India levels in June 2022 from 70.5% a year ago and 73.1% during the same time in 2020. Credit growth in the country is at a 3-year high and continuously inching up as economic activity is taking off.
Challenges and the way forward
The elephant in the room is slower growth in deposits, especially for public sector banks. Slow deposit growth and expected increase in credit demand, as HFI indicates, could lead to liquidity crunch for banks. A very slow growth in deposit can leave banks scrambling for funds and accelerated deposit rates. If the same trend of credit and deposit growth continues, SCBs will have to play it by the ear to raise deposit rates to get over the liquidity crunch, as current market conditions are up in the air and are not in the favour of banks to raise capital.
There is no use crying over spilt milk; banks should accelerate deposit growth with attractive interest rates because they need more deposits to keep pace with credit growth. Thus all other banks pitch in the similar move as followed by Canara Bank and HDFC bank to bulk up its deposits. Rating agency ICRA in a recent report also suggested that banks should “aggressively start chasing deposits, which will lead to higher deposit rates”.
Dr Vinay K Srivastava is an Associate Professor at the Institute of Technology & Science, Ghaziabad, and Managing Editor of ARASH, A Journal of ISMDR.
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