Banks could face a liquidity crisis as loans outstrip deposits

Ajay Ramanathan

Banks are likely to face liquidity shortages in the coming years as loan growth outpaces deposit growth, analysts say. This slow growth in deposits Reserve Bank of India (RBI) is removing excess liquidity from the system to combat inflation.

“Banks quickly depleted their cash reserves and available funds over the past year or two. They used some of that money to fund asset growth. The surplus of statutory liquidity eligible securities has decreased, especially small and medium-sized banks have increased their repo borrowings,” said Jindal Khaliya, Director of Financial Institutions, India Ratings and Research. “Going forward, banks may need to continue to raise deposit rates further and become more dependent on the wholesale side, so bank liquidity will be somewhat tighter.”

To put things into perspective, the latest bi-weekly data from the RBI showed bank lending increased by 17.9% year-on-year to Rs 128.9 trillion as of 21 October. This is the best year-over-year growth in prepayments in nearly nine years. Meanwhile, deposits lagged behind, rising 9.5% year-on-year to he Rs 172 trillion.

Credit rating agency Careedge said in a report dated Oct. 22 that the sharp rise in loans was due to an increase in demand for personal credit and an increase in business working capital needs. In the two weeks that ended Oct. 7, he was at 74.5%.

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To keep up with the growing demand for loans, some banks have already started raising term deposits at higher interest rates.

axis bank has raised interest rates on fixed deposits by up to 115 bps effective from Saturday. This is his second deposit rate hike in two consecutive months.

The State Bank of India has increased interest rates on most individual fixed deposits under INR 20 million from 22nd October by 25-80 basis points.

Going forward, analysts say banks will need to raise interest rates on deposits at a faster pace, albeit in a coordinated manner.

“It is true that it is a changing scenario when it comes to deposit rates. In his monthly income statement, he said:

“Thus, until we reach a steady state, I believe the change in deposit rates is to ensure that deposit growth is attracting and loan growth can be adjusted for whatever it is. ‘ he added.

However, higher deposit rates are unlikely to hurt banks’ net interest margins for at least the next two quarters. However, analysts say banks may incur higher deposit costs in 2023-2024, which will affect margins.

“Deposit costs will eventually rise, but I think we are likely to see the impact of interest rate normalization as well. It also means that the banks have regained pricing power.

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