In a clear signal of intensifying competition among banks in India, growth in credits rose 12.9% during the quarter ended December 2018, compared with only 9.3% growth in deposits, according to India Ratings and Research(Ind-Ra). Also, the five public sector banks (PSBs), those recently came out of the Reserve Bank of India's (RBI's) Prompt Corrective Action framework, are looking for growth. This will add fuel to the competitions.

In a short note co-authored by Karan Gupta, an associate director at Ind-Ra, and Ruhi Pabari, an analyst with the rating firm, the duo foresees a strong pick up in credit growth with the incremental loan to deposit ratio of private banks at 100.5% and PSBs' at 119.5% during the quarter December 2018 over a year ago.

These forecasts by the Mumbai-based rating agency are based on Reserve Bank of India’s (RBI's) recently released quarterly statistics on deposits and credit of scheduled commercial banks for December 2018.

In terms of public versus private banks, PSBs saw credit and deposits growing at 8.4% and 4.9%, respectively, in the quarter ended December 2018. This implies that PSBs could also compete to recoup some of their losses in the deposit market share they conceded to private banks over the years, Gupta and Pabari point out. “The competition for deposits could intensify as five PSBs have recently come out of RBI’s Prompt Corrective Action framework and some of them are likely to look to grow their balance sheets,” Gupta and Pabari add.

On private banks, they point out at the ‘continuing strong credit growth’ of 22.0% for the quarter ended December 2018. Private banks are likely to solicit deposits even by offering higher rates, Gupta and Pabari note.

“This could ultimately result in a divergence in the marginal cost of funds based lending rates of private banks and PSBs”. The one-year deposit rate for HDFC Bank stands at 7.3% in comparison to 6.8% for State Bank of India. Similarly, the gap between private banks and PSBs for their weighted average domestic term deposit rates has increased to 35 basis points (year-to-date average for April to December 2018), from 3-11 basis points over FY14-FY18.

The authors believe that if credit growth continues to outpace deposit growth, then scheduled commercial banks’ reliance on bulk deposits are likely to increase, which could lead to a higher cost of funds along with increasing volatility in the asset-liability structure of banks. The certificate of deposits raised by banks are up 24.6% over a year-ago period (April 2018-February 2019), even as the outstanding amount was up only 3.6% at  Rs 1,78,000 crore.

The longer term trend of market share shift from PSBs to private banks continued to play out in the past 12 months. Private banks saw an increase of 235 basis points to 26.2% and 234 basis points to 31.4% in market share in deposits and credit, respectively, in the past year, while PSBs saw a 274 basis point decline to 65.7% in deposits and a 253 basis point decline in credit to 60.9% during the period.

Gupta and Pabari believe that the trend will continue despite PSBs receiving a large capital allocation of about Rs 1,90,000 crore during FY18-FY19. “Banks have received almost all of the capital infusion required to meet the minimum capital requirements under Basel III regulations, under a modest credit growth assumption,” they add. Furthermore, in the case of transition to Ind-As accounting norms, despite five PSBs exiting the Prompt Corrective Action framework, the advances growth of PSBs could remain constrained as banks would need incremental capital to provide for stage one and stage two assets, the duo explain.

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