If Indian banks struggle to attract enough new deposits to support loan growth, the share of borrowings in their overall funding mix will continue to rise gradually, according to a Fitch Ratings report. Dew.
At the same time, sustained capital market performance could accelerate the shift from personal savings to investment (in stock markets), the report said.
The recent sharp rise in the loan-to-deposit ratio (LDR) could become a structural problem if declining deposit returns and evolving depositor preferences under inflationary pressures impede long-term deposit growth. said the rating agency.
“If banks are unable to attract sufficient low-cost, long-term funding to fund lending expansion, we expect the share of debt in the overall funding mix to continue to rise gradually from the current 10%,” Fitch said. “I am doing so,” he said.
Bank deposit rates have been slow to respond to the significant 250 bps hike in the policy rate during the fiscal year ending March 2023 (FY2023), and time deposit rates are expected to fully absorb this change as of the first quarter of FY2025. It is reflected in Fitch estimates that the rate of return on low-cost deposits will remain unchanged and that the share of new deposits made by low-cost deposits will reach 20% in FY2024, the lowest level in 20 years.
This may put pressure on capital costs in the medium term. Under high interest rates, low-cost deposits usually shift to term deposits, but the proportion of new deposits in the former category will decline to 20% in the fiscal year ending March 2024 (FY2024), the lowest in 20 years. , the report said.
“Factors such as inflationary pressures, increasing digitalisation and strong capital market performance could lead to a further shift of depositors away from bank deposits and into investments,” Fitch said. This trend poses risks to funding costs and could make asset-liability management more difficult if banks’ long-term funding cannot bridge the gap with shifting deposits, the report said.
Fitch does not expect any short-term rating changes as there is ample headroom in the Viability Rating, but there is a risk that margin pressures will increase beyond Fitch’s base case, or that the bank’s growth or liquidity management Significant funding changes that affect the credit rating may require a reassessment of individual key ratings. According to rating agencies, factor scores are important.
Term deposit rates have increased by only 234bps since March 2022, while low-cost deposit rates have remained unchanged. “If future deposit growth is constrained, there is a risk that the recent sharp rise in the loan-to-deposit ratio (LDR) will persist as a structural problem because real deposit returns are low or negative. “Loan growth is also high, as depositor preferences are changing amid inflationary pressures,” Fitch said.
Deposit growth from FY14 to FY24 matched loan growth at a CAGR of 9.4 per cent, while LDRs rose by 10 percentage points from FY21 onwards. Fitch said banks need to focus on increasing deposits to normalize the existing excess liquidity.
Fitch believes that banks’ current deposit pricing strategies are unsustainable in the long term if the economy’s high dependence on bank credit must be supported by deposits.
On the other hand, investment in mutual funds (MF) has increased at a CAGR of 24% since FY2017. If capital market performance continues, the shift from personal savings to investment could accelerate. Demographic changes and digitalization could also spur a shift away from bank deposits, the ratings agency said. “If LDRs continue to rise sharply, margin pressures could increase beyond Fitch’s expectations. Indian banks have limited pricing power and cannot afford to increase funding costs without additional risk-taking. It may not be completely transferable.”
Fitch believes continued easing of the Reserve Bank of India’s liquidity stance or increased government-related capital inflows could continue to ease pressures, while It said reduced inflows could increase pressure on LDRs and asset and liability management.
A larger depositor base from the top 15 urban centers (65 percent of MF assets and 44 percent of bank deposits) could increase inflows and help banks retain deposits.
