Lenders raise rates as credit growth picks up

ByRichard C. Sloan

Jan 17, 2022

Indian banks began raising fixed-term deposit rates on some maturities after several months to meet rising demand for credit, although experts said it was too early for the rate cycle to turn around .

Two major banks, State Bank of India (SBI) and HDFC Bank Ltd, have raised their deposit rates by up to 10 basis points (bps) over the past two weeks. In fact, private lender HDFC Bank raised deposit rates for the second time since December.

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Big banks want to ensure that their lending capacity is not constrained by the availability of customer deposits when demand for credit increases further.

Although loan demand has picked up in the fortnight to December 31, deposit inflows still exceed loan outflows, indicating that smaller banks may not be in a hurry to raise rates.

Non-food credit growth, which has stagnated in a 6-7% range for most of 2021, increased 9.28% year-on-year in the fortnight to December 31.

While it is impossible to determine with certainty which sectors received most of the additional credit deployed, experts said business demand could be driving the growth spurt.

“We will have to wait until the first half of January and monitor outstanding credit to see to what extent this end-of-quarter surge will be reversed. If the amount outstanding does not decrease in January, then it is a sign that companies are borrowing from banks,” said Madan Sabnavis, chief economist at Bank of Baroda.

Sabnavis said that although some banks are raising rates within specific ranges for asset-liability management (ALM) reasons, this still cannot be considered an upcoming change in the rate cycle unless those hikes are are more generalized.

“There is still a disconnect between the market and institutional rates. While bond yields are rising, bank rates have not budged. Over the past fortnight, banks have seen a substantial rise in both deposits and credit. Banks have also taken a lot of money through the certificate of deposit (CD),” he added.

However, the influx of deposits is in no mood to slow down. For the nine months to December 31, while banks’ loan portfolio increased by 7.55 trillion, deposits increased during 10 trillion over the same period. Care Ratings pointed out that deposit growth ranged between 9.3% and 11.6% from April to December and was generally on a downward trend since March last year.

Experts said corporate credit growth would likely go to banks as corporate bond issuance declined. Corporate bond issuance fell more than 25% to around 4.1 trillion in the nine months to December from a year earlier. According to the Chief Economic Adviser of State Bank of India, Soumya Kanti Ghosh, this indicates that the reverse flow of credit from banks to the bond market in FY21 is now in decline as corporate deleveraging and the replacement of high-cost debt with low-cost debt the borrowings on the bond markets seem to have been largely completed.

“This is also possible as businesses across all sectors are now resorting to term loans in anticipation of future growth recovery through several government initiatives,” Ghosh said in a Jan. 12 note.

Ghosh said recent credit growth is visible in sectors such as non-banking financials, telecommunications, oil, chemicals, electronics, gems and jewelry and infrastructure, including power and roads.

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