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Informist, Thursday, Oct. 17, 2024

 

--Fitch: Borrowing of Indian banks to rise gradually in funding mix 

--Fitch: India bks' current deposit price strategy unsustainable in long term 

--Fitch: No imminent pressure on India banks' viability ratings 

 

MUMBAI – The share of borrowing in the funding mix of Indian banks will increase gradually, as lenders fail to attract low-cost term deposits to finance their loan growth, Fitch Ratings said in a release Thursday. The global rating agency also flagged a medium-term burden on banks' funding costs if the deposit growth remains constrained with respect to the rise in loan growth.

 

"Low-cost deposits' migration to term deposits is usual under high interest rates, but the former's share in fresh deposits fell to 20% in the financial year ended March 2024 (FY24), a two-decade low," the rating agency said. The global rating agency highlighted that bank deposit rates have been slow to respond to the 250-basis-point policy rate hike by the Reserve Bank of India in 2022-23 (Apr-Mar). "Term deposit rates have risen by only 234 bps since March 2022, while low-cost deposit rates remain unchanged," it said.

 

The global rating agency said that low or negative real return on deposits, and evolving depositor preferences amid inflationary pressures are key reasons for low migration of funds to banks' term deposits. It said banks need to direct greater efforts towards expanding deposit growth to finance their credit growth as the current pricing strategy employed by banks for their deposits is lacking in its impact. "Fitch considers banks' current deposit pricing strategy unsustainable over the long term, if deposits must support the economy's high reliance on bank credit," the release said.

 

The gap between deposit and credit growth has been a major concern for the Reserve Bank of India, and it has flagged the issue on several occasions, urging banks to mobilise deposits and go easy on advances. The reluctance of banks to raise interest rates on retail deposits is one of the major reasons cited by market participants for the shortfall in deposit growth. Although the latest data shows a slight improvement, the gap between deposit and credit growth is still high. Bank deposits grew 11.5% on year as on Sept. 20, up from 10.8% as of Aug. 23. On the other hand, bank loans grew 13.0% on year as on Sept. 20, compared with 13.6% as on Aug. 23.

 

Fitch said there is no imminent pressure on viability ratings due to the given headroom. However, it added that "individual key rating factor scores may have to be reassessed if the impact on margins, growth and liquidity management is beyond Fitch's base case."  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Vidhushi RajPurohit and Richard Fargose

Edited by Namrata Rao

 

 

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