Deposit growth in India is expected to witness a deceleration to 11.2 percent year-on-year in fiscal year 2025, according to a report by B&K Securities. The report suggests that banks are facing difficulties in mobilizing new deposits.
The report adds that deposit growth was at 13.8% YoY at the end of fiscal year 2024. According to the forecast, the report says that the growth rate would slow down. “We expect deposit growth to further decelerate to 11.2% YoY in fiscal year 2025,” the report says.
Aside from that, the report has also pointed out that the Reserve Bank of India will cut the repo rate by 25 bps this December and another 50 bps in fiscal year 2025. The repo rate is the rate at which RBI lends to commercial banks, which in turn influences interest rates on loans and deposits in the entire banking system.
With a rate cut in view, interest-rate-sensitive assets and deposits. Particularly TD and SA at PVBs, are liable to face some change. The reasons are due either to renewal or reprising, depending upon the ALM strategies pursued by banks, and reset clauses. The report explains, “We believe the RBI will cut the repo rate by 25 bps in December 2024 with a further reduction of 50 bps during the fiscal year 2025. Thus, interest rate-sensitive earning assets and deposits, particularly TD and SA in new-generation PVBs. May undergo reset or reprising related to their ALM strategies and reset clauses.”
The key financial ratios for SCBs discussed in the report include LDR, which is pegged at 79%. While the ratio of “Credit + SLR Investment + Cash” to deposits stands at 113.8%. From these figures, it would seem that there is ample liquidity in banks to fund credit growth and other investments.
A critical factor expected to impact deposit growth is the withdrawal of Rs 2,000 denomination notes worth Rs 3.6 trillion in fiscal year 2024. This, combined with shifting rate expectations, may slow deposit growth.
Another significant development is the upcoming loan repricing linked to External Benchmark Lending Rates (EBLR), scheduled for FY’25-26. “Given the SCBs’ Loan-to-Deposit Ratio (LDR) of 79% and the ratio of credit plus SLR investment and cash to deposits at 113.8%. Along with the absence of Rs 2,000 denomination withdrawals in FY’24. Deposit mobilization is expected to sharply decelerate from the 13.8% YoY growth at the end of FY’24,” the report notes.
The report also indicates that EBLR-linked loans will reset every one to two months. Depending on changes in the repo rate, Treasury Bills (T-Bills), or the Mumbai Interbank Offer Rate (MIBOR). This could disrupt banks’ credit yields and profitability as lending rates become more closely tied to external benchmarks.
ANI