Deposit growth of 16% will feed 25% credit spike: Crisil report

The deposit growth of 16 per cent in 2006-07 will be sufficient for commercial banks to comfortably sustain a credit growth of 25 per cent till end of March 2007, according to Crisil banking sector analysis.

However, banks with low levels of excess statutory liquidity ratio (SLR) investments (just over minimum 25 per cent of net demand and time liabilities) may have to resort to bulk borrowings in the absence of corresponding deposit growth to meet credit expansion, the rating agency said today.

Despite the high credit growth rates, systemic liquidity is expected to be manageable in the medium term. The credit expanded by 32 per cent in 2005-06 over 26 per cent in 2004-05. The deposit grew by 16 per cent in same year, which was not sufficient to cover this increase (in credit growth), Crisil said.

The gap between the deposit and credit growth led to tight liquidity conditions in the second half of 2005-06 which was a temporary phenomenon. Banks managed the tightness by selling off investments and increasing bulk deposits, Crisil said.

According to Reserve Bank of India data, aggregate deposits of banks increased by Rs 68,499 crore (3.2 per cent) up to July 7, 2006 from beginning of the financial year in April against an increase of Rs 19,435 crore (1.1 per cent) in the corresponding period of the previous year.

The accretion to bank deposits during 2006-07 so far is the highest for any comparable period since 1993-94.

Aggregate deposits rose by 20.7 per cent (Rs 3,72,977 crore) till early July 2006 on year-on-year basis, significantly higher than 14.9 per cent (Rs 2,34,020 crore) growth witnessed a year ago.

The increase in non-food bank credit was 32.9 per cent (Rs 3,71,993 crore) on top of an increase of 31.0 per cent (Rs 2,60,164 crore) in the same period.

On the profitability of banks, the rating agency said the core profitability would remain stable despite the increase in the banking sector. The banking sector has had stable interest spread between 2.6 per cent to 3.2 per cent for a decade.

The decline in core profitability in 2005-06 was temporary as yields are expected to improve in the current financial year. The profitability levels to remain range-bound with net profit margins of over 1.50 per cent over the medium term, it said.

The asset quality of the baks has improved significantly. Gross non-performing assets (NPAs) have declined to less than 4 per cent of advances at end of March 2006 from 19.5 per cent as on March 31, 1995.

They (banks) are also adequately capitalised to face stress scenario hence any deterioration in asset quality is unlikely to have severe impact on the banks' balance sheet, Crisil said.