Bank lending rates have increased at a faster pace compared to deposit rates in the current fiscal year. But the pace of increase in deposit rates has accelerated in the recent past. Rising demand for bank credit and lower deposit growth on account of shrinking surplus liquidity have been the main drivers behind this development.
Incremental credit deposit (C/D) ratio of scheduled commercial banks (SCBs) has been consistently trending above 100 per cent since the fortnight ending August 12 till the fortnight ending November 18. It ranged between 107 per cent and 135 per cent during this period. The persistently high incremental C/D ratio indicates that the growth in deposits is lower than the growth in credit offtake and, incrementally, banks are lending more than they are attracting by way of deposits.
This persistent increase in incremental C/D ratio has led to the outstanding C/D ratio also moving up. It had gone up to 74.9 per cent by the fortnight ending November 18 from 72.2 per cent as of the fortnight ending March 25. It had hit a low 69.6 per cent as of the fortnight ending November 5, 2021. It is now moving closer to the above-77 per cent level that it had reached in the pre-pandemic period of November 2018-April 2019.
In October, credit offtake had been very healthy. Outstanding non-food bank credit increased by Rs.2.6 trillion. This is much higher than the average increase of Rs.1.6 trillion in the preceding six months. Outstanding non-food bank credit increased by Rs.10.6 trillion during April to November 18. During the same period, bank deposits increased by Rs.8.3 trillion.
Further, there was a sharp drop in surplus liquidity, which contributed to lower availability of resources with banks. Average daily absorption under the liquidity adjustment facility (LAF) had dropped to Rs.2 trillion in September from Rs.7.8 trillion in April. It shrunk further to Rs.1.6 trillion in November.
RBI intervention in the forex market contributed to the reduction in surplus liquidity from the system. On a net basis, RBI sold US dollars amounting to Rs.2.7 trillion during the September quarter. This was an all-time high. This indicates the large amount of domestic liquidity that was sucked out of the banking system by the RBI to increase the supply of dollars in order to rein in the sharp depreciation of the rupee.
In order to attract more deposits to cater to the rising credit demand, banks hiked deposit rates somewhat aggressively. This is evident from the fact that in the current fiscal year, deposit rates increased at a faster pace in October-November compared to the first half. Term deposit rates, for deposits of more than one year, at the upper end of the rate spectrum, surged by 165 bps to 7.25 per cent by end-November from end-March. Of this increase, 50 bps increase was during April to September. The remaining 115 bps increase was in October-November. At the lower end, term deposit rates rose by 110 bps to 6.1 per cent during the same period. Of this, 30 bps increase was till September whereas the remaining 80 bps was in the following two months.
Various banks launched special fixed deposit plans in October. These are mostly for deposits maturing within about two years. Canara Bank was offering 7 per cent interest rate on a tenure of 666 days (22 months). IDFC First Bank was offering 7.25 per cent on deposits maturing in 750 days (25 months). RBL Bank offered 7 per cent on deposits for 15 months.
Some banks hiked deposit rates twice in October and again in December. SBI raised deposit rates, first by 20 bps followed by an increase of 25 to 80 bps in October. In December, it hiked rates again in the range of 25 bps to 65 bps for deposits of varying durations. In October, HDFC Bank increased rates by 75 bps points followed by another hike of 50 bps. It further hiked rates in December. Punjab National Bank also raised deposit rates twice during October. Axis Bank increased FD rates twice in November. Central Bank of India raised interest rates on fixed deposits by up to 75 bps.
In addition to raising rates to attract more deposits, banks have tried to overcome this shortfall by raising funds from alternative sources. Bank have increased their short term borrowings and also raised funds through certificates of deposits (CDs).
Borrowings by SCBs increased from Rs.2.7 trillion from end-March 2022 to Rs.4.7 trillion by November 18. These borrowings represent the total borrowings from outside the banking system apart from domestic borrowings. It also includes loans/borrowings from abroad by banks in India.
Banks have also resorted to raising short term deposits by issuing certificates of deposits (CDs). During April-November 2022, amount raised through CDs was Rs.3.9 trillion. The highest amount during the corresponding period of the preceding 4 years was Rs.2.8 trillion during April-October 2018.
Interest rate on CDs has also gone up sharply indicating the rising demand for these deposits. At the lower end of the range, interest rates rose from 3.77 per cent in March to 6.64 per cent in November. This was an increase of 287 basis points (bps). At the upper end, interest rates rose from 5.49 per cent to 7.28 per cent in the similar comparable period, a rise of 179 bps.
Liquidity surplus has increased in the first week of December 2022. Average daily absorption under LAF has gone up to Rs.2.5 trillion in this week from a daily average of Rs.1.6 trillion in November. But this might not remain so. In its monetary policy review announced on December 7, the Monetary Policy Committee (MPC) announced that it would continue with its policy of withdrawal of accommodation. In addition, if demand for bank credit also remains strong in the remaining part of the busy credit season, then deposit rates will continue to rise further.