Fitch Ratings says that Indian banks may start borrowing more money if they struggle to get enough new deposits to support their loan growth. The recent sharp increase in the loan-to-deposit ratio (LDR) could become a long-term issue, especially if low interest rates on deposits, high inflation, and changing customer preferences make it harder for banks to increase their deposits.
Bank deposit rates have been slow to change despite a significant rise in policy rates of 250 basis points during the financial year that ended in March 2023 (FY23). It is expected that term deposit rates won’t fully adjust until the first quarter of FY25. Meanwhile, the return on low-cost deposits hasn’t changed, causing their share of new deposits to drop to a 20-year low of 20% in FY24, according to Fitch’s estimates.
Factors like rising inflation, more digital banking options, and strong performance in stock markets are causing customers to move their money from bank deposits to other types of investments. This trend could increase funding costs for banks and make it harder for them to manage their finances if they can’t replace the withdrawn deposits with long-term funding.
Fitch doesn’t expect any immediate changes to banks’ ratings because there’s still some flexibility in their Viability Ratings. However, if there are significant changes in funding that put extra pressure on profit margins, or if these changes affect banks’ growth and cash management, it might lead to a review of their key rating scores.
Source: Fitch
Indian banks now hold a record $51.4 billion in short-term debt, the highest in 12 years. This rise is due to a significant gap between deposits and loan demand, leading banks to rely more on short-term borrowing to meet their funding needs.
