New Delhi [India], September 4 : Amid questions on the depleting loan-to-deposit ratio in Indian banks, a recent report by Motilal Oswal, a financial service company suggests that the loan-to-deposit (LD) ratio is likely to subside on its own in the coming months.
The debate on loan-to-deposit ratio (LD), particularly concerning sluggish deposit growth and potential risks to financial stability is raised by even the finance minister and the RBI governor.
However, the Motilal Oswal report suggests that on closer examination, the situation may not be as alarming as it seems.
The report highlighted that the Indian banking sector's loan-to-deposit (LD) ratio stood at 77.2 per cent as of 9th August 2024, slightly below its recent peak of 78.2 per cent on 22nd March 2024, and its all-time high of 78.8 per cent in September 2013.
The report stated that typically a rising LD ratio is associated with tightness in the banking sector, potentially indicating overheating.
It highlighted that an analysis of the sector's transactions with the Reserve Bank of India (RBI) through the liquidity adjustment facility (LAF), along with recent trends in the weighted average call rate (WACR), suggests that the current rise in the LD ratio does not indicate tightness. Therefore, it is not a cause for immediate concern.
The report added that the concern over weak deposit growth may be overstated. Historical data show that bank deposits grew at an average rate of 9.5 per cent during the pre-COVID period (January 2015 to February 2020) and 10.4 per cent in the post-COVID period (March 2020 to August 2024).
It said as of 9th August 2024, deposits increased by 10.8 per cent year-on-year.
Earlier, Finance Minister Nirmala Sitharaman also urged state-run banks to enhance deposit mobilization through attractive offers and focusing on Tier-2 and Tier-3 cities.
The report said while the exact measures are unclear, however the deposit growth could potentially be increased by making other asset classes less attractive through taxation or interest rates, or by boosting fiscal spending to increase net credit to the government.
"Our analysis suggests that deposit growth could be raised by either making other asset classes unattractive (through taxation and/or interest rate) or increasing the growth in net credit to the government by pushing fiscal spending higher" the report added.
Alternatively, policymakers might consider curtailing loan growth to lower the LD ratio. However, this could slow deposit growth, particularly if corporate credit growth remains weak. Encouraging savers to shift investments from other assets to bank deposits could also be an option, but this carries risks of overreach and potential damage to economic confidence.
As fiscal spending increases, bank credit to the government is likely to grow, which should elevate deposits and broad money supply.
The report said "However, the extent of foreign capital inflows and the RBI's policy for managing these inflows remain uncertain".
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