Banks may choose to borrow further, Fitch said.
Deposits are an issue for Indian banks, which may struggle to secure enough capital to support loan growth due to slow growth.
Fitch Ratings said banks are borrowing more money to meet demand, which could lead to a “shake-up” in their funding mix.
“The recent sharp rise in the loan-to-deposit ratio (LDR) could become a structural problem if declining deposit returns and evolving depositor preferences amid inflationary pressures impede long-term deposit growth. ”, the rating agency said in its report. Report, “Banks in India: Structural changes in the upcoming long-term funding mix”, October 17, 2024.
According to Fitch estimates, the share of new deposits will reach a 20-year low of just 20% in fiscal 2024. This means banks’ low-cost deposit returns remain unchanged and deposit interest rates remain slow to rise, despite a “sharp” 250 basis points (bp) hike in policy rates in FY23. That’s what I received.
Inflationary pressures, increasing digitalization and strong performance of capital markets could lead to further shift of Indian depositors from bank deposits to investments.
Fitch warned that this poses a risk to funding costs. Asset-liability management may become more difficult if banks’ long-term funding cannot bridge the gap with mobile deposits.
