Banks will need to increase deposits rates sooner than later to garner more durable liquidity as credit growth started picking up in H2 (October 2021-March 2022 period), but the deposits growth is lagging behind, according to a State Bank of India (SBI) report.

The Bank’s Economic Research Department noted (ERD) that the incremental credit deposit (C-D) ratio currently stands at 140.

What this means is that for every ₹140 fresh loan that Banks are giving, they are able to garner new deposits of only ₹100.

Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said any delay in raising deposit rates may result in a large incremental increase at a later point of time as banks will have to do a catch up.

Also, small saving rates continue to be attractive in terms of rates.

SBI’s ERD noted that recently, some private banks have raised their term deposits rates in the tenures like 2-3 years, 3-5 years and above 5 years buckets.

Lending rates also need to increase

With the increase in deposits rates, the lending rates also need to increase to preserve the margins, per the report “Ecowrap”.

However, this will be a catch-22 situation as the high lending rates will be danger to incipient recovery.

“This conundrum gets more complex in FY23. In FY22, small savings collections exceeded the budgeted amount by a large ₹2 lakh crore, and that had resulted in net borrowing falling short by ₹1.7 lakh crore.

“The challenge lies in FY23 with net borrowings increasing by Rs 4.1 lakh crores and small savings supposed to be lower by Rs 1.7 lakh crores than the revised FY22 amount,” Ghosh said.

He emphasised that if these numbers fructify in FY23, there will be large pressures on banks to up deposit rates given that small saving rates are already much higher than bank deposit rates.

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