Banks need ₹20 lakh crore in fresh deposits to meet credit demand: CRISIL

Ratings agency CRISIL said it estimates bank credit in India to grow at 13-14% on an average in this fiscal and the next, significantly faster compared to the 8% growth in FY18. The acceleration in credit demand is likely to force banks, especially those in the private sector, to aggressively mobilise deposits over the medium term, CRISIL said in a report released on Wednesday.

The report said banks will need to raise a total of about  ₹25 lakh crore over the fiscal years 2018-19 and 2019-20 to meet this rising demand, of which  ₹5-6 lakh crore is expected to come in through the release of statutory liquidity ratio (SLR) funds. While ₹20 lakh crore will have to be raised via fresh deposits.

“That would be well above the average annual deposit mobilisation of Rs 7 lakh crore over the past few years. It would also put upward pressure on the interest rates bank offer on deposits,” the report said, hinting at higher interest rates on deposits around the corner.

CRISIL said deposit growth for banks has been on a downhill path for the past decade, with the last three years seeing a significant decline as interest rates dropped below the returns that other financial instruments were offering, diverting household savings flows away from banks and into mutual funds, insurance, PPF etc. Deposit growth in FY19 was a mere 6%, which is way behind the peak of 25% in FY07.

Krishnan Sitaraman, senior director, CRISIL Ratings said, “Lower deposit growth has meant a steady rise in the credit to deposit ratio on a stock basis, which is expected to touch 78% by the end of fiscal 2019, compared with 73% at the end of fiscal 2017. Banks will need to raise at least  ₹19-20 lakh crore of fresh deposits until March 2020 to keep the credit-deposit ratio near 80%, which in itself would be highest in a decade.”

The report also said that private banks with “strong balance sheets and robust credit growth are expected to lead the race for deposits and will account for 55-60% of the incremental deposit mobilisation. These would be followed by public sector banks outside the Reserve Bank of India’s Prompt Corrective Action framework with 30-35%.”

CRISIL also sees volatility in equity markets combined with a hike in bank deposit rates in recent months to bring some household savings inflows back into bank deposits.

Rama Patel, director, CRISIL Ratings said, “Over the first nine months of this fiscal, banks have already raised deposit rates by an average of 40-60 basis points We expect banks to sharpen focus on deposit mobilisation over the medium term through attractive rate offerings across tenors in both bulk and retail segments.”