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  3. Banks likely to increase deposit rates in near term: ICRA

Banks likely to increase deposit rates in near term: ICRA

31 Jan 2018 Evaluate

Domestic credit rating agency, ICRA in its latest report has said that banks are likely to increase deposit rates in the near term as incremental credit has outpaced deposits in the last quarter, which has pushed up the credit/deposit ratio (the proportion of deposits used for lending) of the banking system. Besides, it noted that the government's Rs 88,139 crore capital infusion in struggling public sector banks (PSBs), will improve their ability to pursue credit growth in the coming months.

According to the report, while banks have an option of reducing their excess statutory liquidity ratio (SLR) holdings and deploying funds for 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, it anticipates an imminent increase in competition for deposit mobilisation and an upward movement in deposit rates. Further, it highlighted that between September 29, 2017 to January 5, 2018, the incremental credit of Rs 1.85 lakh crore, was significantly higher than the accretion of deposits of Rs 0.30 lakh crore. Besides credit, it pointed out that there has also been a slow increase in currency with public (CWP), which rose by Rs 1.36 lakh crore from September 29, 2017 to January 5, 2018, reaching almost 96 percent of pre-demonetisation levels.

The rating agency further said that while the bulk deposit rates have recently seen an upward trend, the retail deposit rates continued to witness some cuts, although at a lower pace, with the median one-year deposit rate declining by only three basis points during January 2018, despite the 20 bps cut in various small saving schemes of the government effective from January 1. It expects the incremental bank credit offtake to surge in Q4FY18. In order to support the same, it pointed out that the banks will need to mobilise additional deposits as the credit deposit ratio has increased to 74.6 percent as on January 5, 2018, from the lows of 68.5 per cent in December 2016 and 73 percent each at end of FY17 and the second quarter of FY18.

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