India Inc, till recently sitting on a cash pile, is drawing this down. High interest rates have made companies turn away from bank loans to meet their working capital requirements.
Rather, they are withdrawing deposits to meet short-term needs. The corporate sector is also repaying debt, including foreign funds they raised earlier, from deposits earning near-zero real interest due to high inflation. “We are using our own funds instead of borrowing money from banks. The funds are being used for both debt repayment and meeting working capital, capex and other operating and administrative expenses. We are not keeping our funds idle in this environment and are looking to utilise these as efficiently as possible. We will borrow only after interest rates ease,” said Rajeev Talwar, group executive director, DLF.
And, banks are paying the price of such a shift. Reserve Bank of India (RBI) data show banks’ deposit growth plummeted from a high of 19 per cent six months earlier to less than 14 per cent in the first week of March, lower than the nominal GDP growth (which is a sum of inflation and real GDP growth). It has become a matter of concern for policy makers and the central bank has already started to enquire about the matter.
During interactions with bankers on resource mobilisation, RBI asked bankers to explain the sharp fall in deposit growth despite attractive interest rates. It meets bankers twice in a financial year to take stock of liabilities in the system.
"There is absolutely no problem with retail deposits. The issue is with corporate and wholesale deposits, which have taken a beating. The growth in cash accruals of top corporates in the country so far this financial year has been negative. Currently, around 40 per cent of banks' deposits come from the corporate sector and as a result, deposit growth has been slow for banks this financial year,” said the chief financial officer of a large private sector lender.
Bankers say the corporate sector is seeing top line growth but their margins are under pressure. And, with inflation staying high, operating costs are not coming down and companies are holding on to more cash for daily operations.
The depleting cash position of India Inc is also evident from the decline in demand deposits of banks since the end of February. According to RBI data, growth in demand deposits has turned negative since end-February. As on March 9, demand liabilities fell Rs 1,106 crore on a year-on-year basis. During the same period in the previous year, demand deposits grew by Rs 30,000 crore.
“The growth in savings deposits are down partly because of the economic slowdown and partly because corporates are now relying more on internal accruals in meeting business needs and repaying debt. Also, for companies it does not make sense to borrow at current (high) levels of interest rate. Hence, the dependence on internal cash balances has increased. Internal accruals are mostly being used for debt repayment now,” said A Subba Rao, group chief financial officer, GMR.
In addition, companies are becoming more efficient in managing their cash and not keeping their money idle. “They are saying, let me use my own cash for working capital needs instead of taking a fresh loan at a high interest rate,” he said.
Bankers said some companies were withdrawing deposits to pay foreign debt.
Financial disintermediation, or individuals putting more money in assets like gold rather than in banks, has been also cited by bankers as a reason for the slowing in deposit accretion. Bankers said with the real interest rate staying negative for the most part of the past two years, when the deposit rate was lower than inflation, which was hovering around the double-digit mark, cash holders had switched to alternative assets.
