FD rates may rise as loans grow faster than deposits

MUMBAI: Growth in bank credit has outpaced the increase in deposits during the first five months of the current fiscal. As a result, bank deposit rates are likely to move up further, with banks’ weighted average term deposit rates inching up 27 basis points in April-Aug 2023.
According to RBI data, bank deposits grew by 6.6% to Rs 149.2 lakh crore in April-August 2023. For the same period, growth in bank credit rose 9.1% to Rs 124.5 lakh crore. The figures factor in the merger of HDFC with HDFC Bank, which widened the credit-deposit gap as the housing finance company’s deposits were lower than its loans.

In absolute terms, banks have added Rs 11.9 lakh crore of deposits while their loan books have grown by Rs 12.4 lakh crore. The wedge between credit and deposit growth has been managed because of surplus investments by banks in government securities.
According to CareEdge Ratings, credit growth for the current financial year is expected to be 13-13.5%, excluding the impact of the HDFC merger. The rating agency said banks will shore up branch networks to ensure deposit growth does not constrain credit offtake.
According to Madan Sabnavis, chief economist at Bank of Baroda, the difference between credit and deposit growth is reflected in the liquidity in money markets. “It is not surprising that the cost of deposits did increase in July based on RBI data, which would have persisted in August, too,” he said.
The weighted average term deposit rate of banks has risen from 6.28% in April to 6.55% in July 2023.
Last week, PNB raised interest rates on term deposits by 25 bps (100bps = 1 percentage point). Currently, small finance banks have the highest term deposit rates, with Unity SFB offering 9% on 1001-day deposits. Among Indian private banks, DCB offers 7.75% on 25 to 37 months. Punjab & Sind Bank’s 7.4% deposit rate is the highest among public sector banks.
According to economists, one of the critical determinants of deposit rates in the future will be liquidity leakages due to cash withdrawals. There is a fear that the increase in current and savings account deposits due to the withdrawal of the Rs 2,000 banknotes is temporary.
In the short-term, liquidity is expected to come under pressure in mid-September due to the advance tax outflows, which will outstrip the Rs 25,000 crore released by RBI from the incremental cash reserve ratio requirement.