Credit Growth Outpaces Deposits: Impact on Loan Sales & NIMs

Mumbai, Mar 4 (PTI) The continuing gap between credit and deposit growth rates is likely to impact both future loan sales as well as net interest margins of banks, says a report.

Credit off-take grew at 20.3 per cent in this fiscal so far while deposits grew at a slower pace of 13.6 per cent YTD, according to the report by Care Ratings.

The gap between credit off-take and deposit growth rates has resulted in a lower liquidity coverage ratio (LCR) while private banks led by HDFC Bank are reporting lower LCR than their public sector peers.

According to a Care Ratings analysis, HDFC Bank has seen the highest fall from 120 per cent in the July-September quarter of FY24 to around 102 per cent in the third quarter, followed by ICICI Bank and Axis Bank at 118 per cent each for both quarters.

On the other hand, the largest lender SBI has around 140 per cent in the second quarter and around 137 per cent in the third quarter of the current fiscal, while PNB and BoB has over 140 per cent each for both quarters.

The issue gets more complicated given the continuing tight liquidity in the system, which has been accentuated by the merger of HDFC twins in July 2023.

Credit off-take has been around 16 per cent in FY23 and at over 20 per cent so far this fiscal after considering the merger of HDFC twins. If we excluded the merger, credit growth would be around 16 per cent for the year so far and on the other hand, deposit growth has been around 13 per cent.

Retail loans constitute around 34 per cent of total credit outstanding as of December 2023 while industry and services constitute 29 per cent and 24 per cent respectively.

Credit growth has lagged deposit growth in FY21 and FY22 but saw an uptick in FY23 and FY24 broadly outpacing deposit growth. As a result, the credit-to-deposit (CD) ratio has increased to around 81 with a higher ratio for private sector banks at around 94 per cent and around 74 per cent for public sector banks. Care Ratings said in a note Monday.

The LCR was implemented in phases by the Reserve Bank beginning at 60 per cent on January 1, 2015, reaching 100 per cent on January 1, 2019. The ratio increased from 145 per cent in March 2020 to 160.9 per cent and peaked in September 2021 at 171 per cent. But since then the ratio has been on a consistent downtrend trend.

The CD ratio is anticipated to be under pressure due to the continued lag of deposit growth vs the pace of credit expansion with the economy's overall optimistic growth forecasts, the note said.