Deposit growth of banks more impressive than credit growth

Bank deposits grew by Rs 61,701 cr in the period June 29 & September 21, 2012 while outstanding credit grew by Rs 5,642 crore in the same period

Deposit growth in banking system continued to be more impressive than credit growth in the current financial year. This is because high lending rates are still pinching the borrowers. While deposit growth got a boost as risk averse investors opted to park their money in bank deposits despite falling rates.

As per data from the Reserve Bank of India (RBI) released today, bank deposits grew by Rs 61,701 crore in the period between June 29 and September 21, 2012. On the other hand, outstanding credit grew by Rs 5,642 crore in the same period.

In the period between April 6 and September 21 of the current financial year, deposits were up by Rs 1,95,839 crore, while credit was up by Rs 72,923 crore.

"Credit growth is slow because corporates are still finding the base rates of banks high. They prefer borrowing from the market by way of instruments like commercial papers etc,” said  B A Prabhakar, chairman and managing director, Andhra Bank.

Several banks including State Bank of India (SBI), ICICI Bank and HDFC Bank lowered deposit rates in order to protect margin erosion. However, after the 25 basis points cut in the Cash Reserve Ratio (CRR) by the RBI last month, SBI was the only bank which has lowered its base rate by 25 basis points to 9.75%. CRR is the proportion of total deposits a bank has to keep with RBI as cash and currently it stands at 4.5% of banks Net Demand and Time Liabilities (NDTL).

Other banks are looking for cues from the RBI on repo rate cuts. Repo is the rate at which banks borrow from the RBI. In the current fiscal the RBI has cut the repo rate only once by 50 basis points to 8%. A further cut depends on inflation coming under control.

Banks are banking hard on retail credit and in this festival season they have launched various schemes which include reduction in interest rates and processing fees. Bankers are also expecting the second half of the fiscal to be better. According to Prabhakar the second half of the fiscal will be better and RBI's mandate of 17% credit growth for the current fiscal will be achieved.  Abraham Chacko, executive director, Federal Bank concurred, “The second half has always been better in terms of credit growth. The festival season will drive retail credit and government's bold decision will drive corporate credit growth. Further drop in interest rates will also boost credit demand.”