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The share of Indian banks‘ borrowings will continue to rise gradually within their overall funding mix if they struggle to attract sufficient fresh deposits to support loan growth, Fitch Ratings has said.
The recent sharp rise in the loan-to-deposit ratio (LDR) could become a structural issue if low returns on deposits amid inflationary pressures – and evolving depositor preferences – hinder long-term deposit growth, the rating agency has said.
“Bank deposit rates have been slow to respond to the sharp 250 basis points increase in policy rates during the financial year ended March 2023, with term deposit rates to fully reflect this change as of the June quarter,” the rating agency said.
The return on low-cost deposits remains unchanged, leading to their share in new deposits hitting a two-decade low of 20% in FY24, according to Fitch’s estimate.
Factors such as inflationary pressures, increasing digitalisation, and strong capital-market performance may further drive depositors to shift from bank deposits towards investments.
“This trend poses a risk to funding costs, and could render asset-liability management more challenging if banks’ long-term funding does not plug the gap from any migrating deposits,” it said.
Fitch does not expect any near-term rating changes due to adequate headroom in Viability Ratings, but significant funding changes that intensify margin pressure beyond Fitch’s base case – or have an impact on banks’ growth and liquidity management – may necessitate reassessment of individual key rating factor scores.
As per Fitch since, mutual fund investments have grown by a 24% CAGR since FY17, a sustained capital-market performance could accelerate the shift of retail savings to
investments. Demographic shifts and digitisation may also spur the move away from bank deposits.
“A continued sharp rise in the LDR could intensify margin pressure beyond Fitch’s expectations. Indian banks have limited pricing power, which may prevent full pass-through of increased funding costs without additional risk-taking,” it said.
Also, sustained easing of the Reserve Bank of India’s liquidity stance, or higher government-linked inflows, could ease pressure. But declining flows due to lower real return on deposits could raise pressure on LDR and asset-liability management, it said.
It estimated that a widening of the depositor base from the top 15 urban centres – 65% of MF assets, 44% of bank deposits – could augment inflows and support banks’ deposit retention.
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