Q2 scorecard: Banks' loan growth outpaces deposits by a huge margin

Banks walk the extra mile to woo depositors

A short clip went viral on social media last week, and in it a middle-aged man was seen publicising on the streets of Mumbai a deposit scheme of a public-sector bank.

At a time when the liquidity surplus in the banking system has shrunk considerably in the past one month or so, with credit growth outpacing deposit growth by a huge margin, such efforts by lenders to garner depositors are not surprising.

Deposit growth in the system has been trailing credit growth for quite some time now.

According to the Reserve Bank of India (RBI) data, credit growth touched a decadal high of 18 per cent in the fortnight ended October 7 but deposits grew at a much slower pace of 9.6 per cent.

The widening credit-deposit growth gap has exacerbated concern that the slower pace of liabilities growth may prove to be the biggest constraint for loan growth in the system.

A majority of the banks that announced their quarterly earnings this month have reported high loan growth but their deposit growth was seen trailing loan growth by a large margin.

The loan book of ICICI Bank, the country’s second-largest private bank, grew 23 per cent year-on-year (YoY) in the July-September quarter but its deposit growth during the same period was merely 12 per cent.

“Given the tightening of liquidity, incremental loan growth will largely be a function of deposit growth and borrowings that we may do. The customer proposition is about rates and also about convenience, brand, and trust. 

We would like to focus on all of them,” said Sandeep Batra, executive director, ICICI Bank.

“There are retail deposits, current and savings account deposits, and corporate deposits, and then there is the possibility of borrowing as well. So, whatever makes commercial sense within our framework we will do,” Batra said.

Public-sector lender Canara Bank’s global deposits grew at 9.82 per cent YoY in the July-September quarter and domestic deposits at merely 7.7 per cent during this period while advances grew at 20 per cent.

Although the gap is quite substantial, L V Prabhakar, managing director and chief executive officer, Canara Bank, said the bank would not face any issue as far as resources were concerned.

“We have seen good deposit growth in the last fortnight. In the term-deposit segment, a significant amount has been deposited by customers and the number of deposits crossed more than 800,000 in the last 12 days,” he said.

“Recently, we increased the deposit rates for two purposes: Because of high inflation, we wanted our depositors to get decent interest rates; our operating profit and net profit are in a comfortable position, so we want to pay back to our depositors,” Prabhakar said.

Even Axis Bank’s deposit growth at 10 per cent YoY in the September quarter has disappointed analysts.

“With the LDR (loan-to-deposit ratio) at 90 per cent, it remains crucial for the bank to push for higher deposit growth …. Moreover, with retail term deposit growth flat in Q2FY23 (over Q1FY23), further rate hikes to stay competitive can put pressure on the net interest margin,” said Suresh Ganapathy and Param Subramanian in a Macquarie Research report.

Sumant Kathpalia, managing director and chief executive officer, IndusInd Bank, in a post-earnings call said in terms of strategy to gather funds, the bank would continue to offer higher rates than the market.

IndusInd Bank’s deposits grew at 15 per cent in Q2FY23, higher than most of its peers, while its loan book grew at 18 per cent.

HDFC Bank, the largest private sector lender, perhaps had one of the best deposit growth rates in the industry at 19 per cent YoY while its advances grew over 23 per cent YoY.

In the analyst call after the bank’s earnings, Srinivasan Vaidyanathan, chief financial officer, said the bank did not have any formula based on the repo rate or government security yields to set deposit rates.

“We see at which price point we need the money and thereby, pricing is done in such a way,” he said.

Initially banks did not raise deposit rates at the same pace as lending rates because there was excess liquidity in the system, which they were using to fund credit demand. However, with shrinking liquidity banks have begun to raise deposit rates. Recently, State Bank of India has increased retail fixed deposit rates by up to 80 basis points (bps) on select maturities, with effect from October 22. Another lender, IDBI Bank, has come out with a special fixed-deposit scheme offering 6.4 per cent for 555 days.

Other lenders such as ICICI Bank, IDBI Bank and Kotak Mahindra Bank also increased their deposit rates recently.