Bank Deposits Surge, Narrowing Gap With Credit Growth: Jefferies

Analysts at Jefferies highlighted that the recent surge in bank deposit growth, reaching 13 per cent year-on-year (YoY), the highest in six years, has notably narrowed the gap compared to credit growth. However, with the Reserve Bank of India (RBI) maintaining strict liquidity measures, securing funds for further expansion remains a significant challenge for lenders.

Jefferies' note pointed out a positive shift in the past year, witnessing a remarkable 300 basis points (bps) improvement in deposit growth to 13 per cent YoY. This surge was attributed to improved GDP growth and a shift in financial savings from gold and land investments.

While acknowledging this progress, the brokerage firm highlighted that although the wedge between banks' credit and deposit growth has reduced from over 700 bps to 300 bps, the gap remains negative. This continues to pose a challenge for banks in sourcing funds to facilitate their growth strategies.

Moreover, Jefferies highlighted that recent interactions with banks revealed limited visibility on liquidity easing. Consequently, banks are concentrating on enhancing retail deposit collection at their branches by offering higher rates and factoring in slightly reduced loan growth in their operational plans.

To alleviate some liquidity constraints, analysts suggested that an inflow of $20 billion in foreign liquidity into Government Securities (G-Secs) could assist in managing liquidity pressures. This would result from a blend of fresh money supply and a reduction in aggressive investment in G-Secs by foreign banks in India, whose investment portfolios have surged by 50 percent YoY.

While various banks are offering differing interest rates, there's a visible disparity between larger and smaller banks in terms of the rates offered. For larger banks, this disparity might lead to a more pronounced decline in the Casa ratio, impacting their source of low-cost funds due to the significant gap between term deposit and savings rates, currently at 350 bps.

Additionally, the rise in the cost of term deposits and the decline in Casa might impact Net Interest Margins (NIMs), posing a potential risk to margins. However, analysts anticipate this impact to be gradual, speculating that banks could offset it by slowing the growth of operating expenses and reducing credit costs.

In the past month, the Bank Nifty index has shown an 8 percent increase, slightly outpacing the 7 percent rise in the benchmark Nifty.