Mumbai: The loan-to-deposit ratio, or how much a bank lends out of its deposits, touched a 47-year high in December as companies approached banks for funds after defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS) dried up demand for commercial papers.
According to a 7 January report by JM Financial, banks' credit-to-deposit (C-D) ratio rose to 78.6% in December, the highest since March 1971, when it was 79.3%.
Credit grew 15.1% from a year earlier in December, while deposits grew 9.2% in the same period, Reserve Bank of India (RBI) data showed.
Of the total incremental credit expansion of ₹6.3 trillion in the current fiscal, ₹4.8 trillion was in the last four months ended December.
“The divergence between credit growth and deposit growth has widened to 600 bps (basis points), as per the RBI data,” said Rupa Rege Nitsure, group chief economist at Larsen and Toubro Finance Holdings. “This means a few banks have become more aggressive in lending post the liquidity tightness for NBFCs (non-banking financial companies). Several small NBFCs with lower credit ratings have been curtailing disbursements for want of adequate funds.”
“The good thing is that incremental credit growth that had slowed down in October has again picked up robust pace in November. This is encouraging and clearly evident across retail loans, including housing and personal loans (loans to salaried class, etc) and industry,” State Bank of India said in a research note on 1 January.
One of the reasons for the widening gap between credit and deposit growth could be the flow of funds from the bond market to the credit market.
Over the last one year, bond yields have climbed up from 6.48% on 1 September 2017 to 8.18% by 9 November 2018. Also, the recent liquidity squeeze because of defaults by IL&FS led to a disruption in the commercial paper market, resulting in a boost to credit growth.
“Deposit growth has been stagnating over the last few months and credit growth has been pushing up. With elections approaching, currency leakage could continue and slow down deposit accretion to banks. That could weigh on credit growth over the next two months,” said Soumya Kanti Ghosh, group chief economic adviser, SBI.
According to brokerage JM Financial, banks are likely to raise deposit rates if the high C-D ratio persists. “We believe that recoveries from larger NCLT cases currently locked in non-performing loans, announced progressive cuts in SLR (statutory liquidity ratio) by the RBI, open market operations and the seasonal improvement post year-end, could improve the CD ratio without other forms of interventions,” the report said.
SBI's analysis says incremental retail credit expansion in the three months to November at ₹73,800 crore was the highest in a decade. It also said credit to industry picked up in November, with food processing, fertilizer, cement and infrastructure leading the way. Incremental credit to NBFCs fell further to ₹3.7 trillion from ₹16.5 trillion in October and ₹56.5 trillion in September, while that to MSMEs showed negative growth. Despite all this, credit to NBFCs and retail account for 45% of incremental credit expansion for the three months till November.