Low deposit growth spell loan funding challenges for Indian banks

The banks may opt to borrow more, according to Fitch.

Deposits are becoming a problem for Indian banks, as its slow growth means that they may struggle with having sufficient funds to support their loan growth.

This could lead to a ‘shake-up’ in the banks’ funding mix as they borrow more money in order to meet demand, said Fitch Ratings.

“The recent sharp rise in the loan-to-deposit ratio (LDR) could become a structural issue if low returns on deposits amidst inflationary pressures— and evolving depositor preferences—- hinder long-term deposit growth,” the ratings agency said in its report, “Indian Banks: Structural Changes in Long-Term Funding Mix Ahead”, 17 October 2024.

Share of new deposits hit a two-decade low of just 20% in FY2024, according to Fitch’s estimates. This comes as banks’ return on low-cost deposits remain unchanged, and with deposit rates still rising at a slow pace despite the ‘sharp’ 250 basis points (bp) increase in policy rates in the 2023 financial year. 

Inflationary pressures, increasing digitalisation, and strong capital-market performance may further drive Indian depositors to shift from bank deposits towards investments.

This poses a risk to funding costs, Fitch warned. It could render asset-liability management more challenging if banks’ long-term funding does not plug the gap from any migrating deposits.