High Gap Between Credit And Deposit Growth To Impact Loan Sales, NIMs: Report
The gap between credit off-take and deposit growth rates has resulted in a lower liquidity coverage ratio while private banks led by HDFC Bank are reporting lower LCR than their public sector peers.
The continuing gap between credit and deposit growth rates is likely to impact both future loan sales as well as net interest margins of banks, says a report.
Credit off-take grew at 20.3% in this fiscal so far while deposits grew at a slower pace of 13.6% YTD, according to the report by Care Ratings.
The gap between credit off-take and deposit growth rates has resulted in a lower liquidity coverage ratio while private banks led by HDFC Bank are reporting lower LCR than their public sector peers.
According to a Care Ratings analysis, HDFC Bank has seen the highest fall from 120% in the July-September quarter of FY24 to around 102% in the third quarter, followed by ICICI Bank and Axis Bank at 118% each for both quarters.
On the other hand, the largest lender SBI has around 140% in the second quarter and around 137% in the third quarter of the current fiscal, while PNB and BoB has over 140% each for both quarters.
The issue gets more complicated given the continuing tight liquidity in the system, which has been accentuated by the merger of HDFC twins in July 2023.
Credit off-take has been around 16% in FY23 and at over 20% so far this fiscal after considering the merger of HDFC twins. If we excluded the merger, credit growth would be around 16% for the year so far and on the other hand, deposit growth has been around 13%.
Retail loans constitute around 34% of total credit outstanding as of December 2023 while industry and services constitute 29% and 24% respectively.
Credit growth has lagged deposit growth in FY21 and FY22 but saw an uptick in FY23 and FY24 broadly outpacing deposit growth. As a result, the credit-to-deposit ratio has increased to around 81 with a higher ratio for private sector banks at around 94% and around 74% for public sector banks. Care Ratings said in a note Monday.
The LCR was implemented in phases by the Reserve Bank beginning at 60% on January 1, 2015, reaching 100% on Jan. 1, 2019. The ratio increased from 145% in March 2020 to 160.9% and peaked in September 2021 at 171%. But since then, the ratio has been on a consistent downtrend trend.
The CD ratio is anticipated to be under pressure due to the continued lag of deposit growth vs the pace of credit expansion with the economy's overall optimistic growth forecasts, the note said.
