Banks facing challenges in raising low cost deposits as people seek better returns

One reason, behind the slower deposits growth is that people are spending more

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Indians traditionally have been savers and parking money in bank deposits has been among the top go to avenues. But, that seems to be changing with people chasing better returns and turning to investing in equity markets and mutual funds among other things, which perhaps is making it harder for banks to get in more deposits.

To be sure, bank deposits have continued to rise on a sequential as well as year-on-year basis. But, certainly, they are not growing as fast as the banks would want them to and they have lagged the growth in credit for some time now.

Earlier this week, HDFC Bank, the country's largest private sector lender, reported its deposits grew 1.9 per cent quarter-on-quarter (QoQ) to Rs 22.14 lakh crore in the October-December quarter. In the same period, its gross advances were up 4.9 per cent QoQ to Rs 24.69 lakh crore.

Rival private sector lender Kotak Mahindra Bank on Saturday reported a similar trend. Its deposits during the December quarter saw 1.9 per cent QoQ growth to about Rs 4.09 lakh crore from Rs 4.01 lakh crore. During the same period, Kotak Bank's advances rose 4 per cent QoQ to Rs 3.72 lakh crore from Rs 3.57 lakh crore.

Data from the two major private sector lenders shows advances growing at over twice the rate of deposits. One reason, behind the slower deposits growth is that people are consuming and spending more. But, they are also looking at better returns than just parking their money in savings and current accounts of banks.

"Household consumption and the affinity to spend has gone up significantly. People like to travel, go out and eat. There is a whole quest for experience, which also to a certain extent makes a dent to the savings," Shanti Ekambaram, whole-time director, Kotak Mahindra Bank said.

"Second, they are looking for better yields. So, you have seen the equity markets, record SIP (systematic investment plans of mutual funds) flows, you have seen bank deposits. So, its really about how are you going to get a share of a customer's financial wallet towards CASA (current account and savings account) and term deposits," she added.

Recent data from Association of Mutual Funds of India (AMFI) showed mutual funds saw inflows of Rs 17,610 crore in December via SIPs, with the total SIP assets under management now at over Rs 9.95 lakh crore.

The Reserve Bank of India raised its repo rates over 2022-23 financial year by 2.50 per cent and has left it unchanged through this year. Banks in turn have had to raise their interest rates, which has pushed up the cost of deposits. This puts pressure on net interest margins (NIM).

Kotak Bank's NIMs in the December quarter were same as those in the second quarter. Similarly, HDFC Bank's NIMs were also flat QoQ at 3.7 per cent.

What's important to note here is that in the second quarter, banks were impacted by the incremental cash reserve ratio (ICRR) that the Reserve Bank of India had announced at the time. This impact was not there in the third quarter.

There is unlikely to be a pickup in NIMs anytime soon given that liquidity remains tight and competitive intensity remains high with banks looking to make their deposits more attractive.

"This is a competitive market. The liquidity is also tight. Government spending happens, you see more money and liquidity eases then you will see a slightly different scenario. But, suffice to say banks have to go out and make an aggressive strategy for deposits," said Ekambaram.

Analysts point out that a key driver for strong credit growth in recent quarters has been a strong growth in retail credit, especially unsecured loans, which should come down, given RBI tightening consumer lending norms in November. While deposit growth has picked up, narrowing the gap with credit growth, its been mostly driven by higher growth in term deposits (TD).

"This (deposit) growth is mainly driven by higher TD and bulk deposit growth, which coupled with deposit rate hikes by select banks should drive up funding costs, partly offset by some relief on the withdrawal of ICRR," Anand Dama of Emkay Global Financial Services said in his preview on banking sector earnings recently.


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