Money & Banking

How RBI’s possible rate cut today could add pressure on PSU banks’ deposit growth

Radhika Merwin | Updated on August 07, 2019

The escalating US-China trade war and turbulence in the currency markets may weigh on any decision that the RBI takes

Deposit rates of public sector banks are already significantly lower than that of private banks; they may not be able to pass on a rate cut that easily

Aside from the high slippages that SBI reported in the latest June quarter, what stands out in India’s largest bank’s Q1 results, is the weak trend in deposit growth. SBI has been lagging the overall growth in deposits over the past one year; the June quarter was no different.

While at the overall system level, deposits grew by 10 per cent YoY in the June quarter, for SBI, its domestic deposits grew by a modest 7.4 per cent. The story is similar for most public sector banks that continue to witness weak deposit growth -- in the June quarter, deposits of listed PSU banks grew by a muted 6-odd per cent as against the 18-20 per cent growth reported by their private peers.

Deposits rates of PSU banks, which have been significantly lower than most private banks over the past year, has been a key reason for the muted show in their deposits. With credit growth also weak, they have been less pressured to contain the flight of deposits to private sector banks. Instead, PSU banks have been selling their excess holdings in government securities over the past year to raise funds.

Weak show

While PSU banks have been enjoying a chunk — over 65 per cent share in overall deposits — they have been losing market share over the past year. PSU banks have grown deposits by a modest 4-6 per cent through most of last year, even as private sector banks retained a tidy 18-20 per cent growth.

Term deposit rates in the one year and above bucket for state-owned and private sector banks have seen the widest divergence. While leading private sector banks have been offering 7-7.3 per cent (few even close to 8 per cent), most state-owned banks have been offering 6.5-6.75 per cent for such deposits.

Recently, SBI slashed deposit rates by a sharp 50-75 bps in the very short term tenure and by 10-20 bps in other term deposits. If other PSU banks follow SBI’s lead, then deposit growth could remain muted in the coming months too.

In the June quarter, SBI’s term deposits grew by 7.4 per cent, a far cry from the robust 20-30 per cent growth in term deposits of leading private sector banks. In fact, over the past four to five quarters, term deposit growth for SBI has been muted in the 5-8 per cent range.

The bank has been relying on its excess investments in government securities to fund its credit growth (still muted though when compared to private sector banks)

Selling off

From around Rs 8.6 lakh crore investments in government bonds last year, as SLR (statutory liquidity ratio) SBI’s investments in SLR fell to Rs 7.4 lakh crore in the latest June quarter. From 32 per cent of domestic deposits last year, SLR investments for SBI are now about 26 per cent.

The latest cut in deposits rates can continue to add pressure on deposit growth for the bank. It could continue relying on its excess SLR investments to fund growth; though the leeway has reduced significantly over the past year.

PSU banks sitting on large investments in government bonds were huge net sellers in government bonds in 2018-19 -- net selling ₹37,670 crore. In the current fiscal so far (up to July) they continue to be net sellers to the tune of about Rs 64,000 crore.

Published on August 07, 2019

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