As the impact of the pandemic continues to fade away, credit offtake in the financial system has been gathering momentum. The credit demand from personal loans, industry loans, the service sector, and Loans from agriculture and allied activities has picked up considerably. This clearly shows that credit activity is slowly growing, which had fallen during the pandemic. The credit demand from the MSME sector, according to PTI, has doubled compared to pre-pandemic levels. However, the deposit growth has not kept pace with the credit growth.
Credit demand is gathering momentum; Will deposits catch up with the pace?
While credit demand is increasing from all sides, deposit growth has lagged. According to the RBI data, credit growth in the system was 14.52 per cent in the fortnight ended July 29. But deposit growth was merely 9.14 per cent during the same period.
According to the CMIE report, outstanding personal loans increased by 1.5 per cent in June 2022 compared to the previous month. This was the highest growth among the major segments of bank loans.
The disbursal of personal loans by scheduled commercial banks (SCBs) increased by Rs. 1,342 billion in the quarter-ended June over the preceding quarter.
Housing loans make up half of the outstanding personal loans. Vehicle loans make up around 10 per cent. Credit card debt accounts for 4% of total outstanding debt, while consumer durable loans account for less than 1% of total outstanding debt. The category "other personal loans’ makes up a substantial chunk of 25 per cent.
Housing loans increased by Rs. 565 billion during the quarter that ended June 2022. The report said this was the highest disbursement in any June quarter in the past fiscal years.
It further said that the demand for personal loans will increase ahead of the festive season.
Credit to industry, on the other hand, increased by 9.5% in June 2022, according to Business Standard reported, citing RBI data. Credit to medium-sized businesses increased 47.6 per cent year on year in June, compared to 59 per cent in the same month last year. Credit growth to micro and small businesses increased to 29.6 per cent from 11.6 per cent the previous year.
Credit growth in the large industries segment was 3.3 per cent, compared to a 4.8 per cent contraction in June 2021.
Credit to the services sector grew by 12.8 per cent in May 2022 (4 per cent a year ago). This is mainly due to improved offtake by non-banking financial companies (NBFCs), professional services, and transport operators.
Credit growth to agriculture and allied activities amid the onset of the monsoon and the Kharif sowing season was 13 per cent in June 2022 (against 10.6 per cent in June 2021). In March 2022, it was 9.9 per cent.
Deposit growth lags behind
While credit demand is increasing from all sides, deposit growth has lagged. According to the RBI data, credit growth in the system was 14.52 per cent in the fortnight ended July 29. But deposit growth was merely 9.14 per cent during the same period, which led to a spread of 538 basis points.
In the fortnight ended July 30, 2021 bank advances stood at ₹108 lakh crore and deposits at ₹155.49 lakh crore. In FY 2021-22, bank credit rose 8.59 per cent and deposits rose 8.94 per cent.
Meanwhile, Banks approached the RBI in June to allow them to spread provisions for mark-to-market losses over several quarters in order to support credit growth, but the RBI turned down the banks' request. Experts believe that banks may again approach the central bank for the same, according to media reports.
On August 05, the RBI governor, Shaktikanta Das, said that " Banks cannot always rely on the central bank's money and they must mobilise deposits to fund credit offtake in the economy."
The treasury losses caused by rising bond yields had a significant impact on the margins of major public-sector banks in Q1FY23. In June, the yield on the Indian 10-year government had traded close to a 3-year high of 7.6%.
The country's largest lender, SBI, reported a 6.70 per cent drop in its standalone profit after tax at ₹6,068 crore for the quarter that ended June after it booked ₹6,549 crore in MTM losses on its investment book. The lender reported a profit after tax (PAT) of ₹6,504 crore on a standalone basis in the April-June quarter of fiscal 2022.
On the other hand, Punjab National Bank reported a 70 per cent drop in stand-alone net profit to ₹308.44 crore in the June quarter as against a net profit of ₹1,023.46 crore in the year-ago period. It posted an Rs. 1,409 crore MTM loss in the June quarter.
As a part of SLR (Statutory Liquidity Ratio), banks will maintain large holdings of government securities, including state development loans and treasury bonds. Any volatility in the bond market is expected to affect their treasury income.
Interest rate hike on deposits will be aggressive in the coming months
Banks are hiking deposit rates in line with the RBI rate hikes but at a slow pace. When the RBI hikes repo rates, banks will immediately increase lending rates, but they go slow on deposit rates.
This is because when rates are raised, banks will earn more money on net interest margins. Margin spreads will widen as interest income from loans and investments rises faster than the interest expense paid to depositors as interest rates rise.
On July 29, the credit rating agency ICRA said that the Indian banks will be forced to sharply hike their deposit rates in the coming months due to the rise in interest rates and credit demand.
To fund incremental credit demand in the economy, banks have increasingly relied on certificates of deposit. Banks' outstanding volumes have risen to 243 per cent as on July 01, 2022, on a year-on-year basis to ₹2.4 lakh crore, according to an analysis by ICRA Ratings.
The spread between bank CDs and the average six-month deposit rate had jumped to 170 basis points in July, compared to just 30 bps in April.
At 1.5% of total deposits as of July 1, 2022, CDs are yet to touch the peak level of June 2011 when they were at 8.3% of total deposits, ICRA said.
"We also expect a hike in the repo rate by 60 bps by September to 5.5%, which will further push yields on various benchmark instruments like T-Bills up and hence the bank CD rates, thereby widening the spreads even more compared to bank deposit rates." " This will force banks to start chasing deposits aggressively by offering higher rates in the next three quarters," opines Anil Gupta, a vice president with the agency.
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personal financeTeam MintGenie
personal financeKirti Jha
personal financeDeepika Chelani