Mid-sized private banks have been leading the increase in deposit rates amid tight system liquidity and the widening gap between deposit and credit growth.

While term deposit rates have increased for the entire banking system over the last 6-8 months, the increase by mid-sized private banks in deposits of a certain tenure, has been much sharper compared to peers, according to India Ratings.

Further, some of these banks had continued to offer higher deposit rates through the pandemic—when systemic liquidity was in heavy surplus — which helped them garner new retail depositors.

“The improvement is visible on two fronts — better overall deposit accretion and meaningful improvement in the share of current account savings account (CASA) deposits,” the ratings agency said.

Narrowing CASA gap

This growth has been led by factors such as seamless digital interface and thrust on building a franchise, and will be credit supportive for these banks by helping them augment their liability base.

Mid-sized private banks have been trying to attract customers through higher rates and innovative products. This combined with reduced dependence on door-to-door banking and more cross-selling opportunities, has resulted in strong deposit accretion — visible in the narrowing gap in the CASA ratio of mid-sized and large private banks.

As a result, mid-sized banks will create competition for small finance banks in the short-to-medium term, and also for large banks in the medium term, India Ratings said, adding that they are likely to become more prominent in the metro and tier-I cities.

“Thus, the competition in the deposit accretion will continue, and could aggravate in case credit demand for long-term capex picks up.”

Deposit-credit ratio

Even though credit growth will continue to outpace deposit growth for the remainder of FY23, the gap between credit and deposit will fall in FY24 driven by moderation in credit demand and likely improvement in the balance of payment account.

“Therefore, deposit accretion will continue, and scheduled commercial banks’ reliance on bulk deposits and borrowings would increase hereon. Moreover, banks will continue to use one to three-year buckets, given the largely short-term nature of credit demand,” it said.

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