Indian banks' deposits and loans grew at record speed but borrowing may hit a bump

In the April to June 2023 quarter of FY23, banks are expected to see the net interest margin decrease. This can be attributed to the rise in cost of funds for lenders as most of the lending rate hikes have already taken place.

For FY23, the banking sector reported deposits of Rs 180.44 lakh crore and loans of Rs 136.75 lakh crore, leading to a credit-deposit ratio of 75.8 percent. This ratio is the highest in the past three years, up from 72.2 percent the previous year.

Deposit data shows, there has been a decrease in the incremental growth of demand deposits, which is the lowest in the past three years. On the other hand, there has been a significant increase in incremental growth of term deposits to the best ever for a fiscal year.

It should also be noted that due to rise in interest rates in FY23, some low-cost deposits may have been shifted to high-cost term deposits.

As of February 2023, personal loans have been the major contributor to loan growth in FY23, as per sectoral data. The incremental loan growth from March 2022 to February 2023 amounts to Rs 15.6 lakh crore. Personal loans constitute 40.2 percent of the incremental loan growth, followed by services at 32.5 percent, agriculture at 12.5 percent, and industry at 8.9 percent.

As of February 2023, there has been a year-to-date decline of Rs 19,734 crore or 1.3 percent in food credit.

Breaking down the loans by industry as of February 2023, personal loans account for 29.84 percent of loans, followed by services at 26.2 percent, agriculture at 24.47 percent, industry at 12.3 percent, food credit at 6.92 percent, and others at 0.26 percent.

Looking ahead, there could be a slowdown in loan growth as higher principal repayments may also contribute to a decline in the loan growth rate. Additionally, inflation may pose a challenge to loan growth for the banking sector in the coming quarters.

The deposit momentum will be a crucial factor to monitor. There is a competition for deposit rates, with HDFC Bank offering one of the highest term deposit rates among large peers.

Private banks are focusing on branch expansion to increase their balance sheets. On the other hand, several PSU banks have witnessed an increase in their balance sheets due to their foreign books.

However, given the slowdown in the global economy, it is important to keep a watch on the performance of the overseas book for some of these PSU banks.