Banks likely to hike deposit rates in near term: ICRA

Banks are expected to hike deposit rates in the near term as incremental credit has outpaced deposits over the last quarter, which has pushed up the credit/deposit ratio of the banking system, according to credit rating agency ICRA. With a cumulative cut of 240 basis points (bps) in 1-year deposit rates during the last three years, the deposit rate cut cycle has reached an inflexion point, with the increasing likelihood of deposit rate hikes in the immediate term, in ICRA’s view. One basis point equals one-hundredth of a percentage point.

In line with seasonal trends, ICRA expects incremental bank credit offtake to surge in Q4FY2018. In order to support the same, the banks will need to mobilise additional deposits as the credit- deposit ratio has increased to 74.6 per cent as on January 5, 2018, from lows of 68.5 per cent in December 2016 and 73 per cent each at the end of FY2017 and Q2FY2018.

The agency said recent capital allocation by the Centre under the public sector banks (PSBs) recapitalisation programme will improve the ability of PSBs to pursue credit growth in the coming months. While banks have the option of reducing their excess SLR (statutory liquidity ratio) holdings and deploying the same towards incremental credit, ICRA observed that they may prefer not to do so, as it may trigger an upward movement in bond yields and add to their treasury losses. Therefore, ICRA anticipates an imminent increase in competition for deposit mobilisation and an upward movement in deposit rates.

Karthik Srinivasan, Group Head - Financial Sector Rating, ICRA, said : “The need for higher deposit mobilisation and the trend of increasing deposit rates is already visible in the bulk deposit segment, with the surge in volume of certificates of deposits (CDs) outstanding as well as increase in minimum CD rates during the last quarter. Banks with higher proportion of bulk deposits have already undertaken a hike in deposit rates during January 2018, although it remains limited to a few banks”.

ICRA assessed that with systemic liquidity remaining in surplus from demonetisation until the first fortnight of December 2017, the real need for the banking system to pursue deposit mobilisation did not arise.

However, with the gradual reduction in liquidity surplus and sporadic days of liquidity deficits during the last fortnight of December 2017, the volume of bank CDs and minimum borrowing rates had increased to Rs 1.52 lakh crore and 6.23 per cent, respectively, as on January 5, 2018, from the lows of Rs 82,412 crore and 6.12 per cent, respectively, as on September 15, 2017.

According to the rating agency’s analysis: “While bulk deposit rates have recently seen an upward trend, the retail deposit rates continued to witness some cuts, albeit at a lower pace, with the median 1-year deposit rate declining by only 3 basis points (bps) during January 2018, despite the 20 bps cut in various small saving schemes of the GoI effective from January 1,2018.”

The median 6-month and 1-year deposit rates for large PSBs and private banks (PVBs) stood at 6.25 per cent and 6.60 per cent, respectively, during January 2018, similar to the minimum CD rate of 6.23 per cent during the fortnight ending January 5, 2018.

Incremental credit in the current financial year (till January 5, 2018) stood at Rs 2.02 lakh crore, far outpacing additional deposits of Rs 1.27 lakh crore. Similarly, during the period September 29, 2017 to January 5, 2018, incremental credit of Rs 1.85 lakh crore was significantly higher than accretion of deposits of Rs 0.30 lakh crore.

ICRA said the slow accumulation of deposits can partly be attributed to the continued increase in currency with public (CWP), which increased by Rs 1.36 lakh crore from September 29, 2017 to January 5, 2018, reaching almost 96 per cent of the pre-demonetisation levels.

With the GoI announcing bank-wise capital allocation during January 2018 under the PSB recapitalisation plan, the banks will have some clarity on the magnitude of capital they would receive by March 2018, which would improve their ability to pursue credit growth and push up the credit- deposit ratio.

“The excess SLR holding of the banks remained elevated at Rs 11.36 lakh crore (excess of 10.4 per cent over the required level of 19.5 per cent) as on December 22, 2017. While banks have the option of reducing their SLR holdings and deploying the same towards incremental credit, they may prefer not to do so, as it may trigger an upward movement in bond yields and add to their treasury losses. Accordingly, we expect the banks to focus on deposit mobilisation to support credit growth by offering better rates to depositors,” said Srinivasan.

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