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Banks may have to increase interest rates on term deposits by around 100 basis points in the next one year to mop up resources required to fuel 20 per cent credit growth in calendar year (CY) 2011, said Care Ratings in a study.
In order to achieve a credit growth of 20 per cent, which translates into incremental credit of Rs 7.50 lakh crore, in CY2011, banks will need to garner additional deposits of at least Rs 10.5 lakh crore to maintain a credit-deposit ratio at 75 per cent.
“The banking sector has to garner 41 per cent more money in the form of new deposits in CY2011 than what they had done in CY2010 to maintain the credit growth momentum…..This would put upward pressure on the interest rates offered on deposits,” said the study.
That mobilising deposits would be a daunting task is underscored by the fact that the banking sector has managed to achieve an average growth of 12 per cent a year in incremental deposits in the last four years.
The economic buoyancy, increasing spends on infrastructure and rising commodity prices would continue to drive the demand for bank credit, said Care Ratings. Given the availability of funds, the demand for credit could well exceed the 20 per cent mark.
Given that deposit growth is not keeping pace with credit growth, the credit rating agency expects the banking regulator to cut the cash reserve ratio (the slice of deposits that banks have to park with Reserve Bank of India) by more than 200-250 basis points to ease the tight liquidity situation being faced by banks.
Referring to the fact that banks extended incremental credit of Rs 7.40 lakh crore in CY2010 (Rs 7.10 lakh crore in CY2009), resulting in the investment-deposit ratio falling to 29.1 per cent in December 2010 (33.1 per cent in December 2009), Ms Revati Kasture, Head – Industry Research, Care Ratings, said going forward, the scope of funding the credit growth out of bank investments is limited.
In case the banking system is not able to garner additional deposits of at least Rs 10.5 lakh crore, then the credit growth of 20 per cent in CY2011 will be at risk, cautioned the study.
The negative effect of such a scenario is that availability of finance, especially for micro, small and medium enterprises and companies with lower credit ratings would be difficult.
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