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Deposit growth in the Indian banking system continues to lag credit growth at 16.1 per cent. There was some improvement with a 12.5 per cent year-on-year growth in the December quarter of FY24, compared with 9.6 per cent in FY23. However, following the increase in policy rates and bank rates on term deposits, the deposit mix has changed and the CASA (current account–savings account) deposit ratio has declined (despite HDFC Ltd’s amalgamation with HDFC Bank) by around 200 bps since the March quarter of FY22. Funds have moved from CASA to better yielding products. The higher rates on term deposits has further widened the interest rate gap.
It should be noted that with the current interest rate cycle expected to reverse in the latter half of FY25, some of the funds could return to CASA and elevate the CASA ratio. Further, as system credit growth improved in FY22-23, most public sector banks (PSBs) had on average a loan-deposit ratio (LDR) of around 65 per cent, way below the 82–83 per cent at private banks, which allowed them to drive loan growth and profitability without the need to grow deposits commensurately.
However, now with most PSBs also operating at the higher end of their LDR range (around 75 per cent), they will need to grow their deposits to match the strong systemic loan growth. With LDR at an all-time high, the long-term growth and profitability of banks will depend on their deposit mobilisation and the quality of their deposit franchise.
Households look away
One should also note that households, which are the main drivers of bank deposit growth with a nearly 60 per cent share, have been gradually moving away. The growth of this segment has slowed from 9–10 per cent year-on-year over FY19-23 to about 1 per cent over FY23–H1FY24, which has been a drag on deposit growth.
The primary reason for households moving away to other financial assets (mutual funds, small savings schemes, and so on) and physical assets (homes, vehicles, and so on) is the expectation of better returns alongside housing and personal mobility needs. Banks have also increased the weighted average domestic term deposit rates on fresh rupee term deposits by 269 bps (since January 2022) to 6.49 per cent in December 2023, as against 250 bps hike in repo rates since May 2022.
A few scheduled commercial banks and most small finance banks, which are building their low-cost CASA franchise, are offering higher tiered interest rates on savings account balances that exceed certain thresholds. Banks with established CASA franchises have mostly stayed away from such offerings as these would impact their margins. Banks also continue to use wholesale deposits, including bulk deposits, opportunistically to meet the demand for lending.
Coveted bank balance
Outstanding certificates of deposits (CDs), at ₹3.45 lakh crore, is up 17.3 per cent year-on-year, though the incremental CD contribution to overall deposit growth stood at 2.15 per cent in the December quarter of FY24 after peaking at 12.65 per cent a year ago. Banks are exploring multiple strategies to increase deposit growth. A few are selectively offering higher savings bank rates to attract deposits.
Banks have also been tinkering with deposit rates in select maturity buckets to make them attractive to customers as part of their asset-liability management. Banks (especially private banks) are also opening more branches, with some focusing on semi-urban and rural areas.
To build customer loyalty, banks are offering longer tenor products such as home loans, which helps increase savings account balance, as the customer is likely to keep the account steadily funded for EMI payments. Strategies also include getting the customer to register for bill payments through the account, which again can keep the account funded for the payments on an ongoing basis.
(The writer is Director and Head–Financial Institution, India Ratings & Research)
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