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Explained | RBI concerns over slow deposit growth – Mintpaisa

The RBI logo

The RBI logo | Photo credit: Getty Images

The story so far: The Governor, Deputy Governor and some other senior officials of the supreme banking regulator, the Reserve Bank of India (RBI), met on November 16 with managing directors and CEOs of public banks and some private sector banks. Acknowledging the role played by private commercial banks in supporting economic growth during the pandemic and the ongoing turmoil in financial markets, the Governor advised banks to “remain vigilant” to macroeconomic developments, including global fallout. Discussion points included, among others, deposit growth lagging behind credit growth, asset quality and adoption of new era technology solutions.

Why have banks been asked to remain “vigilant”?

At present, global headwinds emanate from three sources; Russian actions in Ukraine are impacting energy supply and prices (especially in Europe), the economic slowdown in China due to frequent lockdowns due to its zero COVID policy, and the rising cost of life due to the resulting inflationary pressures.

Thus, monetary policies across the world, especially in advanced economies, are being tightened, raising concerns about the risk to financial stability in emerging and developing economies. “Drag” occurs in two general ways. First, lower external demand leads to lower export demand, forcing economic growth to be solely driven by domestic demand which may not be strong enough. Second, higher global inflation and interest rates impact the flow of capital into the economy, putting downward pressure on the domestic currency and, in some circumstances, higher imported inflation. To this effect, the regulator had stated in its November newsletter: “The (domestic) macroeconomic outlook can best be characterized as resilient but sensitive to formidable global headwinds”.

What about deposit growth versus credit growth?

It is important to note that the banks’ credit disbursement bandwidth is determined by its internal reserves. More importantly, the demand for credit increases with greater economic activity. According to the RBI bulletin, overall demand at the national level currently presents a “patchy profile”. Urban demand appears robust and rural demand, which was subdued, has also started to strengthen recently. Commercial bank credit growth also increased, driven by services, personal loans, agriculture and manufacturing, in that order. This reflects the growing preference for bank credit to meet working capital needs.

How do we compare to deposit and credit growth?

According to the latest RBI weekly data for regular commercial banks, aggregate deposits rose 8.2% vs. 11.4% year-on-year, while credit drawdowns jumped 17% vs. an increase of 7.1% over one year. base.

Senior Director and Deputy Director of Ratings at CRISIL Ratings, Krishnan Sitaraman, observed that it is not that deposit growth has fallen significantly, but that credit growth has increased in recent quarters. During the pandemic, due to the decline in economic activity, credit growth followed a slower trajectory. Now that economic activity has returned to normal, credit growth has accelerated, particularly in the previous three quarters. Analysts also pointed to deposit rates not rising as another reason for slowing deposit growth. While banks passed on higher rates through loan portfolios, most of which were at variable rates, the approach was very measured when it came to deposit rates. While this has helped banks’ net interest margins, it has not increased their bandwidth to disburse more credit.

What about the quality of banks’ assets?

RBI’s November newsletter informed that Gross Non-Performing Assets (GNPAs) have steadily declined, with Net NPAs dropping to 1% of Total Assets. Liquidity coverage is solid and profitability is strengthened. However, market participants have expressed concerns about companies in light of the macroeconomic situation.

“We can expect asset quality to improve on the corporate loan portfolio. The reason for this is the deleveraging that has happened in Indian companies over the years where most companies have been able to reduce their debt levels and improve their credit profiles,” says Mr. Sitaraman. Corporate NPAs are expected to decrease in current and future fiscal years due to the creation of the National Asset Reconstruction Company. Ltd, which is expected to take over some of the former business lending NPAs that are still with the banks.

However, he expects the NPAs of MSMEs, whose loan share accounts for around 15% of banks’ loan portfolio, to increase. Either way, overall NPAs for banks are expected to decline further in the short to medium term, with the corporate segment, which accounts for around 45% of loan portfolios, driving the decline.

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