Banks' deposit growth at 6-year high, lowers gap with credit growth: Jefferies

In the past one month, the Bank Nifty index has gained 8 percent as against 7 percent rise in the benchmark Nifty

The uptick in bank deposit growth to 13 percent year-on-year (YoY), the highest in 6 years, has lowered the gap with credit growth, but with RBI maintaining tight liquidity, securing funds for growth is a key challenge for lenders, analysts at Jefferies said.

Over the past one year, one of the positive trends has been the 300 basis points (bps) improvement in deposit growth to 13 percent YoY, Jefferies said in a note. This was a result of improved GDP growth and shift to financial savings against gold and land.

"With this, the wedge between banks' credit and deposit growth has halved from over 700 bps last year to 300 bps now. But, still the gap is negative and securing funds for growth will continue to be a challenge for banks," the brokerage firm highlighted.

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Moreover, Jefferies noted that their recent meetings with banks indicated little visibility on easing liquidity. Hence, banks continue to focus ramping-up retail deposit mobilisation at branches, offering higher rates and factoring slightly lower loan growth in their business plans.

In order to ease some liquidity pressures, analysts believe inflow of $20 billion foreign liquidity into G-Secs can help through a combination of new money supply and unwinding of aggressive investing in G-Secs by foreign banks in India, whose investment book is growing by 50 percent YoY.

While banks are offering higher rates, large banks are offering lower rates and in some cases term rates are lower than saving deposit rates.

For instance, some smaller private banks are offering interest rates of 7-7.5 percent on saving deposits as against peak term deposit rate of 7-7.2 percent being offered by larger banks.

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Hence, for larger banks, analysts believe that they may see a sharper fall in Casa ratio (which is a source of low-cost funds for banks) as gap between term deposit and savings rate is 350 bps.

That apart, lower NIMs arising from rise in term deposit cost and fall in Casa can be a risk to margins from here on. However, they expect that this drag to be slower and banks may be able to compensate for some impact through slower growth in operating expenditures and lower credit costs.

In the past one month, the Bank Nifty index has gained 8 percent as against 7 percent rise in the benchmark Nifty.

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