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30
January 2018
 |
Expect (The Total
Investment & Insurance Solutions)
ICRA
expects banks to hike deposit rates in the near term, as incremental credit has
outpaced deposits over the last quarter, which has pushed up the credit/deposit
ratio of the banking system. Additionally, the recent capital allocation by the
Government of India (GoI) under the public sector banks (PSBs) recapitalisation
programme will improve the ability of PSBs to pursue credit growth in the
coming months. The Total Investment & Insurance
Solutions
While banks have an option of reducing their excess SLR holdings and deploying the same towards incremental credit, they may prefer not to do so, as it may trigger an upward movement in bond yields and add to their treasury losses. Therefore, ICRA anticipates an imminent increase in competition for deposit mobilisation and an upward movement in deposit rates.
Karthik Srinivasan, Group Head - Financial Sector Rating, ICRA Ltd, said, “The need for higher deposit mobilisation and trend of increasing deposit rates are already visible in the bulk deposit segment, with the surge in volume of certificate of deposits (CDs) outstanding as well as increase in minimum CD rates during last quarter. Banks with higher proportion of bulk deposits have already undertaken a hike in deposit rates during January 2018, although it remains limited to a few banks”. The Total Investment & Insurance Solutions
With systemic liquidity remaining in surplus from demonetisation until the first fortnight of December 2017, the real need for the banking system to pursue deposit mobilisation didn’t arise. However, with the gradual reduction in the liquidity surplus and sporadic days of liquidity deficits during the last fortnight of December 2017, the volume of bank CDs and minimum borrowing rates increased to Rs1.52 lakh cr and 6.23%, respectively, as on January 5th 2018, from the lows of Rs82,412 cr and 6.12%, respectively, as on September 15, 2017. The Total Investment & Insurance Solutions
While the bulk deposit rates have recently seen an upward trend, the retail deposit rates continued to witness some cuts, albeit at a lower pace, with the median 1-year deposit rate declining by only 3 bps during January 2018, despite the 20 bps cut in various small saving schemes of GoI effective from January 1st 2018. With the cumulative cut of 240 bps in 1-year deposit rates during the last three years, the deposit rate cut cycle has reached an inflexion point, with an increasing likelihood of deposit rate hikes in the immediate term in ICRA’s view. The median 6-month and 1-Year deposit rates for the large PSBs and private banks (PVBs) stood at 6.25% and 6.60%, respectively, during January 2018, similar to the minimum CD rate of 6.23% during the fortnight ending January 5, 2018. The Total Investment & Insurance Solutions
The incremental credit in the current financial year (till January 5, 2018) stood at Rs2.02 lakh crore, far outpacing the additional deposits of Rs1.27 lakh crore. Similarly, during the period September 29, 2017 to January 5, 2018, the incremental credit of Rs1.85 lakh crore, was significantly higher than the accretion of deposits of Rs0.30 lakh crore. The slow accumulation of deposits can partly be attributed to the continued increase in currency with public (CWP), which increased by Rs1.36 lakh crore from September 29, 2017 to January 5th 2018, reaching almost 96% of the pre-demonetisation levels.
In line with seasonal trends, ICRA expects the incremental bank credit offtake to surge in Q4 FY2018. In order to support the same, the banks will need to mobilise additional deposits as the credit deposit ratio has increased to 74.6% as on January 5, 2018, from the lows of 68.5% in December 2016 and 73% each at end of FY2017 and Q2FY2018. With the GoI announcing the bank wise capital allocation during January 2018 under the PSB recapitalisation plan, the banks will have some clarity on the magnitude of capital they would receive by March 2018, which would improve their ability to pursue credit growth and push up the credit deposit ratio. The Total Investment & Insurance Solutions
“The excess SLR holding of the banks remained elevated at Rs11.36 trillion (excess of 10.4% over the required level of 19.5%) as on December 22, 2017. While banks have an option of reducing their SLR holdings and deploying the same towards incremental credit, they may prefer not to do so, as it may trigger an upward movement in bond yields and add to their treasury losses. Accordingly, we expect the banks to focus on deposit mobilisation to support the credit growth by offering better rates to depositors”, says Srinivasan.The Total Investment & Insurance Solutions
While banks have an option of reducing their excess SLR holdings and deploying the same towards incremental credit, they may prefer not to do so, as it may trigger an upward movement in bond yields and add to their treasury losses. Therefore, ICRA anticipates an imminent increase in competition for deposit mobilisation and an upward movement in deposit rates.
Karthik Srinivasan, Group Head - Financial Sector Rating, ICRA Ltd, said, “The need for higher deposit mobilisation and trend of increasing deposit rates are already visible in the bulk deposit segment, with the surge in volume of certificate of deposits (CDs) outstanding as well as increase in minimum CD rates during last quarter. Banks with higher proportion of bulk deposits have already undertaken a hike in deposit rates during January 2018, although it remains limited to a few banks”. The Total Investment & Insurance Solutions
With systemic liquidity remaining in surplus from demonetisation until the first fortnight of December 2017, the real need for the banking system to pursue deposit mobilisation didn’t arise. However, with the gradual reduction in the liquidity surplus and sporadic days of liquidity deficits during the last fortnight of December 2017, the volume of bank CDs and minimum borrowing rates increased to Rs1.52 lakh cr and 6.23%, respectively, as on January 5th 2018, from the lows of Rs82,412 cr and 6.12%, respectively, as on September 15, 2017. The Total Investment & Insurance Solutions
While the bulk deposit rates have recently seen an upward trend, the retail deposit rates continued to witness some cuts, albeit at a lower pace, with the median 1-year deposit rate declining by only 3 bps during January 2018, despite the 20 bps cut in various small saving schemes of GoI effective from January 1st 2018. With the cumulative cut of 240 bps in 1-year deposit rates during the last three years, the deposit rate cut cycle has reached an inflexion point, with an increasing likelihood of deposit rate hikes in the immediate term in ICRA’s view. The median 6-month and 1-Year deposit rates for the large PSBs and private banks (PVBs) stood at 6.25% and 6.60%, respectively, during January 2018, similar to the minimum CD rate of 6.23% during the fortnight ending January 5, 2018. The Total Investment & Insurance Solutions
The incremental credit in the current financial year (till January 5, 2018) stood at Rs2.02 lakh crore, far outpacing the additional deposits of Rs1.27 lakh crore. Similarly, during the period September 29, 2017 to January 5, 2018, the incremental credit of Rs1.85 lakh crore, was significantly higher than the accretion of deposits of Rs0.30 lakh crore. The slow accumulation of deposits can partly be attributed to the continued increase in currency with public (CWP), which increased by Rs1.36 lakh crore from September 29, 2017 to January 5th 2018, reaching almost 96% of the pre-demonetisation levels.
In line with seasonal trends, ICRA expects the incremental bank credit offtake to surge in Q4 FY2018. In order to support the same, the banks will need to mobilise additional deposits as the credit deposit ratio has increased to 74.6% as on January 5, 2018, from the lows of 68.5% in December 2016 and 73% each at end of FY2017 and Q2FY2018. With the GoI announcing the bank wise capital allocation during January 2018 under the PSB recapitalisation plan, the banks will have some clarity on the magnitude of capital they would receive by March 2018, which would improve their ability to pursue credit growth and push up the credit deposit ratio. The Total Investment & Insurance Solutions
“The excess SLR holding of the banks remained elevated at Rs11.36 trillion (excess of 10.4% over the required level of 19.5%) as on December 22, 2017. While banks have an option of reducing their SLR holdings and deploying the same towards incremental credit, they may prefer not to do so, as it may trigger an upward movement in bond yields and add to their treasury losses. Accordingly, we expect the banks to focus on deposit mobilisation to support the credit growth by offering better rates to depositors”, says Srinivasan.The Total Investment & Insurance Solutions
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