First time in 4 years: India’s deposits outpace credit growth

Amid wary banking system and subdued demand conditions.

Rising concerns over asset quality has led the banking sector to step up vigilance and due diligence in recent quarters. At the same time, demand from industrial and service sectors have also been subdued, even after factoring in the base effect distortions.

According to a report by DBS, in a first since FY10, deposit growth has outpaced non-food loan activity this year. Between April and October, credit growth grew an average 12.5% YoY whilst deposits took a narrow lead at 13.1%. This divergence has seen the banks’ credit to deposit ratio inch down to 75.8% by end-Oct from 77% last year.

Citing this weak end-demand which has hurt loan take-up, few banks have selectively lowered deposit rates in the past couple of months. Loan rates might follow suit in a bid to shore credit activity (even if policy rates prove stickier), as borowers’ have been drawn to other cheaper funding alternatives, including corporate bonds/commercial papers. Rupee-denominated bond issuances jumped to the highest in over five quarters in Jul-Sep.

Soft credit growth meanwhile points to slower pick-up in economic activity, even if the former is a lagging indicator. Factory output lost steam in the Sep quarter with manufacturing activity nearly flat on the year. 2Q (Jul-Sep) GDP numbers due next week will see growth hit a soft patch from Jun quarter’s 5.7% YoY. Nonetheless, we remain optimistic that project clearances, reviving infrastructure investments and capital spending will spur lending growth into FY16.