Banks relying more on bonds for raising capital as deposit growth slows down

28 Sept 2022 , 11:20 AM

Since consumers are experiencing significant income loss as a result of inflation's impact on deposit growth, banks have more than doubled their market borrowing to lend as core deposit growth has trailed behind the demand for loans.

According to the most recent Reserve Bank data, these borrowings, which are in addition to interbank and RBI borrowings and mostly consist of different types of bonds raised from the market, doubled to Rs4.95 lakh crore from Rs2.43 lakh crore in early September.

According to data from the RBI, high loan demand has caused the incremental credit deposit ratio to reach 111% as of September 09, while deposits only rose by 9.5%. Loan growth reached multi-year highs of 16.2% at that time.

This suggests that new loans made by commercial banks so far, this fiscal year have exceeded new deposits made by banks to fund them.

At the system level, the outstanding credit deposit ratio is 73.6 6%. The pressure on core funds is obvious when you take into account a statutory liquidity ratio of 18%, which requires banks to park 18% of their deposits in government bonds, and a cash reserve ratio of 4.5%, which requires a 4.5% parking of cash funds with the Reserve Bank of India.

Banks are anticipated to boost rates in response to the Reserve Bank's anticipated 50 basis point increase in repo rates when its monetary policy committee meets this week. Banks may be pushed to aggressively communicate the rates to depositors because the majority of their deposit returns are negative in real terms.

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