Emkay Institutional Equities predicted the credit growth in India to moderate down to 12-14 per cent on a yearly basis over the financial year 2024-25 and 2026-27 from the current 16.5 per cent.
The loan-to-deposit ratio (LDR) is predicted to decrease to a reasonable level of 75 per cent from its current high of 80 per cent.
The financial services company explained that the prolonged period of high interest rates, increased costs of obtaining funds, along with the growing risk of poor quality in unsecured retail loans, all contribute to the potential risks involved in profitable lending.
Furthermore, it stated that the recent measures taken by the RBI to control the rapid expansion of unsecured loans or loans provided by non-banking financial companies may have a negative impact.
According to a report from the financial services company, the decrease in transient deposits should not be solely responsible for any anticipated slowdown in credit growth in the near-to-medium term. However, if the risk related to the quality of assets improves, the deposit growth may recover.
The report stated that certain banks have decreased the surplus cash on their balance sheets in order to support the expansion of credit. This has resulted in a slowdown in deposit growth and has helped to maintain profit margins.
However, the majority of these strategies have been mostly used up, meaning that banks will need to gather deposits in order to gradually finance the expansion of credit.
Emkay Institutional Equities has stated that banks will continue to prioritize low-cost deposits, making it crucial for them to increase deposit growth in order to sustain credit growth in the future.
Anand Dama, a Senior Analyst in the BFSI sector at Emkay Global Financial Services, expressed "The extended elevated rate cycle and, thus, higher funding cost coupled with rising asset-quality risk in unsecured retail loans contributing 12 per cent of YTD credit growth has raised concerns about profitable lending. The recent RBI's actions to contain the bank's undeterred growth in unsecured/NBFC loans has instilled fear amongst the lending institutions. Every bank will need to find its method for winning or at least surviving the retail deposit war."
According to Emkay Institutional Equities, private sector banks such as HDFC Bank, ICICI Bank, Axis Bank, and IDFC Bank are actively expanding their branches and have identified specific areas where they aim to attract retail deposits. On the other hand, public sector banks (excluding State Bank of India and Bank of Baroda) are falling behind in this regard and may face long-term consequences as a result.
Emkay Institutional Equities highlighted that private sector banks like HDFC Bank, ICICI Bank, Axis Bank, and IDFC Bank are currently focused on expanding their branches and have identified specific areas to attract retail deposits. However, public sector banks, excluding SBI and Bank of Baroda, are not keeping up and may face consequences in the future.
According to the report from the financial services company, digital banking is deemed essential, but traditional branches are still crucial for gathering retail deposits and are considered the heart of the banking experience.
The argument made is that the increase in digital transactions decreases the reliance on cash and, as a result, reduces the loss of deposits at a larger scale. Additionally, this trend enables banks to attract technologically adept customers and benefit from their transaction activity, ultimately leading to improved customer deposits.
However, it is important to note that despite advancements in digital banking, branches continue to play a crucial role in gathering deposits. This is not only true in India but also in other countries. The article further highlights the strong connection between the increase in market share of deposits and the presence of physical branches, even in today's digital era.
Branches also play a crucial role in enabling banks to expand their retail lending operations in non-metro areas, which in turn contributes to the growth of retail deposits. Furthermore, while metropolitan areas continue to be significant sources of deposits, their proportion is gradually decreasing.
Emkay is of the opinion that banks will reap long-term benefits by prioritizing their attention on branches located in urban, semi-urban, and rural areas, particularly in the Hindi Heartland States. This strategy takes into account the potential for growth in credit and deposits.
