Banks are unlikely to undertake major hikes in deposit rates: Expert

With the reduction in statutory liquidity ratio and open market operation bond purchases, RBI is pushing liquidity into the system

Pick-up in credit growth is definitely a positive for banks. According to the Reserve Bank of India’s (RBI’s) data, as of December 21, the loan book of all scheduled banks rose 15 per cent year-on-year. 

But on the flip side, credit-to-deposit ratio touched its highest level of 79 per cent in December 2018, amid slower growth in deposits (9 per cent). 
 

Does this indicate a challenging situation for banks in the near term amid an expected rise in deposit rates, which would weigh on their profitability? Probably, not. 

The pick-up in bank advances is expected to persist in the near term helping banks’ net interest income and margin. G Chokkalingam, founder & managing director at Equinomics Research & Advisory, said, “With the liquidity issue at non-banking financiers and loan securitisation by them, improvement in economic activities amid low crude oil prices and a stronger rupee, demand for banking credit would remain higher and so would the credit-to-deposit ratio.”

Deposits are the key source of funding for banks. With more inflow into other investment products such as mutual funds and insurance, banks’ deposits rose at a slower pace. However, there are a few factors which will benefit the banks and therefore there is no need to force them to go for significant deposit rate hikes.

With the reduction in statutory liquidity ratio (SLR) and open market operation (OMO) bond purchases, RBI is pushing liquidity into the system. “RBI has indicated that OMO will be continued even in the March 2019 quarter and announced reduction in SLR in its bi-monthly monetary policy in December. Thus, banks are unlikely to undertake major hikes in deposit rates,” said Anil Gupta, head-financial sector ratings at ICRA.

The OMO provides an opportunity for banks to sell their SLR investments with limited impact on bond yields, he added. After a series of OMOs earlier, the central banks last week conducted a Rs 10,000 crore OMO bond purchase.

Some analysts believe that reduction in SLR will add Rs 25,000-30,000 crore to the banks’ liquidity bucket every quarter. Besides, recoveries from big bad loan accounts would be another liquidity source for banks. 

According to JM Financial’s report, since around 10.8 per cent of system loans are currently locked in non-performing loans (NPLs) or bad loans, the recoveries from these (especially the larger National Company Law Tribunal cases) could provide a boost to the liquidity in the near term.

Moreover, the recent sharp correction in government bond yields is likely to help banks, especially public sector ones, to generate more liquidity. Experts believe banks may use this opportunity to sell their government bonds.

Thus, despite the expectations for a pick-up in banking credit, sharp increase in deposit rates to shore up liquidity looks less likely. 

Amid the high credit growth, the Nifty Bank Index has been an out performer, gaining 8.7 per cent from the end of September 2018 against 1.5 per cent fall in the Nifty 50. While State Bank of India and Bank of Baroda are the top picks of brokerages from among public sector banks, ICICI Bank and Axis Bank are the favourites among private peers.