Pressure on net interest margins may force commercial banks to align loan growth more closely with deposit growth, the Reserve Bank of India’s state of the economy report said.
Deposit growth has been outpacing loan growth by banks for more than a year now, prompting the regulator to nudge banks to beef up resource mobilization. Latest data shows year-on-year bank credit growth till July 26 was 13.7 per cent, while deposit growth was 10.6 per cent.
“In the quarter ending June 2024, banks have been impelled to increase mobilisation of funds through certificates of deposit and through high-value savings accounts and fixed deposits,” the report authored by RBI staffers said.
“Going forward, the low share of low-cost current and savings deposits in total deposits may curb domestic fundraising efforts of banks through high-cost funding options, due to a likely squeeze on banks’ net margins,” the report said. The views of the report are those of the authors and not of the RBI.
“This may also force banks to align loan growth more closely with deposit growth and normalise incremental credit-deposit ratios. In part, this behavioural shift may be induced by signs of stress in the unsecured loan segments, especially in personal loans and credit card portfolios,” the report said.
The report noted that certificate of deposit (CD) issuances by banks amounted to Rs 3.49 trillion during 2024-25 (up to August 9), significantly higher than Rs 1.89 trillion in the corresponding period of the previous year.
“This increase can be attributed to deposit growth lagging behind credit growth, prompting banks to rely on alternative sources of funding,” the report noted.
Commenting on the decline of headline inflation to below 4 per cent—the monetary policy’s target—the report attributed the fall to statistical base effects.
“…inflation moderated from its spike in June to below the target of 4 per cent in July, but this was primarily due to the downward statistical pull of large base effects that concealed the strong price build-up in the food category,” it said.
The report noted that the price momentum in the food category in the CPI in July was much higher than long-period averages. “This has also propelled CPI headline momentum above trend,” it said.
With the vegetable price shock continuing unabated, food items like pulses exhibiting double-digit inflation along with elevated cereals inflation, and core inflation registering an uptick after a period of sustained sequential softening between June 2023 and May 2024, the report cautioned that these developments ‘impart an upside to the overall inflation outlook.’
The report said aggregate demand conditions are gathering momentum after a slack in the April-June period, and rural consumption spending, on the back of growing incomes, is beginning to drive volume growth in fast-moving consumer goods (FMCG).
Reflecting these forces of turnaround, FMCG companies are starting to see green shoots of revival, it said.
“These factors, which act as stimuli to demand, are expected to reinvigorate the hitherto subdued participation of the private sector in total investment, a key accelerator of overall growth of the economy in view of higher levels of productivity and innovation,” the report said, while adding there are some lead indications already of new capacity creation in a few industries and a pick-up in investment intentions.
First Published: Aug 19 2024 | 8:14 PM IST
