Competition for deposits to rise

Mumbai: With bank deposits growing slower than loans, banks are under pressure to grow their deposits so as to boost their resources to lend.

Moreover, with five state owned banks recently coming out of the Reserve Bank of India's (RBI) Prompt Corrective Action framework and some of them looking at growing their balance sheets, the competition for deposits could intensify. Banks are also facing stiff competition in deposit mobilisation from post office schemes and other investment avenues that are offering higher interest rates.

The PCA framework had restricted public sector banks to lend and thereby led to a lower focus from them on deposit mobilization. While the credit growth for the banking system was at 12.9 per cent year on year, the deposit growth was lagging at 9.3 per cent year on year according to the RBI data for December 2018. The incremental loan to deposit ratio of private banks at 100.5 per cent and public sector banks (PSBs) at 119.5 per cent over 3QFY18-3QFY19 also highlight a strong pick-up in credit growth.

"Public sector banks have also seen credit growth of 8.4 per cent year on year and deposit growth at 4.9 per cent yoy in 3QFY19, which implies that they could also compete to recoup some of the deposit market share loss that they have conceded to private banks over the years," said India Ratings.

With private banks seeing continuing strong credit growth at 22 per cent yoy in 3QFY19, they are likely to solicit deposits even by offering higher rates said India Ratings. This could ultimately result in a divergence in the marginal cost of funds based lending rates of private banks and PSBs. The one-year deposit rate for HDFC Bank stands at 7.3 per cent in comparison to 6.8 per cent for State Bank of India. Similarly, the gap between private banks and PSBs for their weighted average domestic term deposit rates has increased to 35 basis points (YTD average for Apr-Dec-18) from 3 to 11 basis points over FY14-FY18.

Private banks maintained a strong momentum on gains in deposit share largely at the expense of PSU banks, a trend that is seen in all deposits products and across geographies according to MB Mahesh, Analyst at Kotak Institutional Equities.

India Ratings said that if credit growth continues to outpace deposit growth, then scheduled commercial banks reliance on bulk deposits is likely to increase which could lead to a higher cost of funds along with increasing volatility in the asset-liability structure of banks. The certificate of deposits raised by banks are up 24.6 per cent yoy (April 2018-February 2019), even as the outstanding amount was up only 3.6 per cent at Rs 1.78 lakh crore.

The longer term trend of market share shift from public sector banks to private banks continued to play out in the last 12 months. Private banks saw an increase of 235 bps to 26.2 per cent and 234 bps to 31.4 per cent in market share in deposits and credit, respectively, in the last one year while PSBs saw a 274 bps decline to 65.7 per cent in deposits and a 253bp decline in credit to 60.9 per cent.