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The banking sector's incremental credit-deposit ratio is likely to moderate to less than 90 per cent by end of March 2011. This would be driven primarily by lower credit growth, because of higher lending rates, coupled with improvement in retail deposit mobilisation, because of recent deposit rate hikes, said rating agency Crisil, in a recent report.
For the nine months ended December 31, 2010, the incremental CD ratio rose to 105 per cent, the report said.
“A high incremental CD ratio indicates weakness in the sector's resource profile, reflecting the inadequacy of retail deposits to support credit growth,” Crisil said.
Slower response
The increase in the banking system's CD ratio primarily reflects banks' slower response in aligning deposit rates, with the increase in the Reserve Bank of India's benchmark rates, along with a revival in the credit offtake in the second half of 2010.
According to Mr Suman Chowdhury, Head – Crisil Ratings, the expectation of moderation of the CD ratio is substantiated by the fact that banks have started raising deposit rates. However, the benefit of these higher rates is yet to be fully reflected in the deposit growth of the banking system.
This may happen by March 2011, when the annual deposit growth should accelerate to nearly 18 per cent. At the same time, credit growth is likely to moderate to 20 per cent for the financial year 2010-11, from the 24 per cent as on end-December 2010, because of steady increase in the lending rates.
increasing asset-liability mismatches
The report also said that gap between tenures of loans and deposits, on account of growth in loans to infrastructure projects, poses a longer term challenge of increasing asset-liability mismatches (ALM) in the banking system.
Active steps to develop the bond markets are needed to mitigate the impact of such emerging ALM risks.
The banking system's exposure to infrastructure projects was at 14 per cent as of November 2010 and may increase to around 16 per cent, by March 2011.
The steady rise in exposure to long-term project and infrastructure loans may constrain the banking sector's ability to take further exposures in the infrastructure segment over the medium term, unless active steps are taken to mitigate this risk by refinancing loans of completed projects, the report said.
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