Your Money: Credit growth of banks to remain slower in near term

Reserve Bank of India (RBI) has reduced repo rate by 115 basis points (bps) since March 2020.

The overall credit growth in the banking sector has remained flat for the fortnight ending June 19, 2020. The credit growth has continued to remain nearly at half the level during the last two fortnights at 6.2%, compared to last year’s level of 12.0% (as of June 21, 2019) and 12.3% (as of June 7, 2019) owing to risk aversion in the banking system and weak demand. Though the lockdown due to coronavirus pandemic ended since June 8, 2020, the metropolitan regions which accounts for nearly 63% of bank credit are still not open completely, hence credit pickup is weak.

Reserve Bank of India (RBI) has reduced repo rate by 115 basis points (bps) since March 2020. This has been followed by banks reducing their lending rates. For example, HDFC Bank announced a cut in its lending rate by 5 bps across all tenors, effective from June 8, 2020. Banks are choosing their credit portfolios with a higher degree of caution despite decline in interest yields. As a result, credit growth of banks is expected to remain slower in the near term.

Deposits growth

Deposits growth stood at a marginally lower level of 11% (as of June 19, 2020) compared with a growth of 11.3% in previous fortnight, but improved on year-on-year (y-o-y) basis (10% y-o-y as of June 21, 2019). Moreover, the banks have been lowering their deposit rates to protect margins. The banking system daily average liquidity stood at `6.4 lakh crore during the fortnight ended June 19, 2020) vis-à-vis liquidity of `6.8 lakh crore during the previous fortnight.

The decline can be attributed to the scheduled advance tax payments by corporates and individuals. For instance, State Bank of India (May 2020) and ICICI Bank (June 2020) have reduced their fixed deposit (FD) rates by 40 bps and 25 bps, respectively.

The banking system liquidity is expected to remain in a surplus position with the growth in the bank deposits being notably higher than the bank credit growth. The market borrowings by the central (`30,000 crore) as well as state governments (`16,060 crore) could weigh on liquidity surplus.

Credit-to-deposit ratio

The credit-to-deposit (CD) ratio stood at 73.9% for the fortnight ended June 19, 2020 as compared to 73.5% for the previous fortnight and 77.2% for the fortnight ended June 21, 2019.

Time deposits, which account for 89.5% of aggregate deposits (89.7% share in June-19), grew at a slower pace compared to demand deposits which account for the balance share of 10.5% (10.3% share in June-19). The share of bank credit to total assets stood stable at 67% since March 2020 till the fortnight ended June 19, 2020.
The Statutory Liquidity Ratio (SLR) investment to total assets has increased from March 2020 due to rate cut by RBI and stood stable for last two fortnights. The SLR investments stood at `41.4 lakh crore and `41.5 lakh crore for the last two fortnights and `34.7 lakh crore for the fortnight ended June 21, 2019.

Source: Edited extracts from Care Ratings report