Although India is generally viewed favorably, its stock market highs As well as healthy bank balance sheets, the deposit shortage is causing some unease in the country’s financial sector.
Reserve Bank of India (RBI) Governor Shaktikanta Das discussed slowing bank deposit growth and poor loan expansion in an exclusive interview with CNBC.
Das said there was no reason to worry at the moment, but if the situation continued, there could be trouble down the road.
“So there’s a gap of 350 to 400 basis points,” he said, referring to the difference between credit and deposit growth. Annual data for August showed loan growth at 13.6% and deposit growth at 10.8%. Reuters reports.
“If this continues, then banks’ ability to continue lending will naturally be affected,” Das added in an interview on Friday.
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When loans exceed deposits, net interest margins — the difference between what a bank earns from lending and what it pays out on deposits — take a hit. This could have an impact on share prices as many global institutional investors hold shares in Indian banks. In severe cases, it could cause banks to have liquidity problems if they are unable to meet withdrawal demands.
Das noted that these loans may be deposited elsewhere, remain in the banking system, and are not drawn from funds that may go into potentially riskier investments, such as debt funds or the stock market.
“If people go into capital markets, that’s their decision … we have nothing to say about that,” he said.
Das added that banks still have room to increase deposits, however. “I’m pleased to note that most banks are now really putting plans in place and they are working hard to launch new deposit mobilization products.”
Commenting on the same theme, Ashish Gupta, chief information officer of Axis Mutual Fund, said he sees a bleak profit outlook for Indian banks compared to the past two years, partly due to the credit and deposit gap.
“I think it’s clearly a no-brainer. You’re going to see slower earnings growth for banks,” he told CNBC’s Street Signs Asia.
He supported the view that deposit growth will slow down from the past few years and stressed that future interest rate cuts by the Reserve Bank of India will also have a negative impact on banks’ profit margins.
India’s second-quarter GDP growth slowed to 6.7% from 8.2% last year, putting greater pressure on the central bank to reverse its recent interest rate hike cycle. The market currently expects the probability of the Reserve Bank of India to cut interest rates at its December meeting to be close to 95%, while confidence in the next meeting in October is low. Das stressed that the Monetary Policy Committee will have new members at its October meeting.
“We will discuss and decide in the Monetary Policy Committee, but in terms of growth and inflation dynamics, I would like to say two things. One is that the growth momentum continues to be good, India’s growth story is intact and in terms of inflation, the outlook is Specifically, we have to focus on the sequential momentum,” he said.
He said the decision on whether to cut interest rates in October will be based on this.
