Rising loan demand from companies and consumers has pushed annual credit growth to a decade high of 17.95% as of October, compared to a five-year average of 9.7%, data provided by the Reserve Bank of India shows. However, the deposit collection has failed to keep pace and is still staying close to its five-year average of 9.4%, pushing bankers to look for ways to lure deposits.
Lenders have to compete for liquidity with equities and debt funds which offer chances of better returns than bank deposits. As inflation has surged to a five-month high of 7.4%, according to the government, real returns on bank deposits, which in most cases is about 6% annual interest rate for two years, remains negative.
“Banks are funding most of the loan growth through liquidity built up through deposits coming off the coronavirus when credit dipped,” according to Krishnan Sitaraman, deputy chief ratings officer at CRISIL Ltd., the Indian unit of S&P Global Ratings. “They need to shore up deposits now.”
A video of an official at Canara Bank, an Indian state-run lender, advertising its deposit plans through a megaphone on pavements in the outskirts of Mumbai has been going viral on Twitter. A spokesperson for the bank declined to provide details about how many of its officials are resorting to this strategy to collect funds.
Meanwhile, Axis Bank Ltd., which saw a 70% surge in net income in September quarter from the previous year on loan growth is tying up with mom-and-pop stores to sign up new customers. The lender is “sweating the franchise” to garner deposits, Ravi Narayanan, head of retail liabilities, branch banking and products at the lender said in a media briefing.
Lenders are also raising the deposit rates to make it more attractive to customers. State Bank of India has increased the interest rates on some deposit plans by as much as 60 basis points in the past 30 days, data available on its website shows.
“There is no doubt that deposit rates will move up further as banks may not want to slow loan growth which has come after many years,” Pritesh Bumb, lead analyst at DAM Capital Advisors Ltd. Five of the nation’s six biggest banks that have reported earnings for the latest quarter have either matched or exceeded analyst’s expectations due to rise in income from loans.
Still, the loan growth is likely to outpace deposit growth till March end, according to estimates by Bloomberg Intelligence analyst, Rena Kwok.