Deposit War Among Lenders Set To Intensify, Says Emkay Global

As the Indian banking sector rides retail credit growth, the biggest challenge could be raising retail deposits at a reasonable cost, according to Emkay Global Research.

With continued deposit rush among Indian banks, it is only expected to get more intense due to rising structural risks and high loan-to-deposit ratio issues.

Credit growth is expected to moderate to 12-14% over FY25-27, from the current 16.5%, Emkay said.

This would be on the back of rising asset quality concerns in unsecured loans, and may also lead to a slowdown in LDR to 75% by FY27, from the current 80%.

A part of the reason for high LDR is due to HDFC Bank Ltd.'s merger with Housing Development Finance Corp., according to Anand Dama, senior analyst, BFSI at Emkay Global.

A combination of factors like slower branch expansion and household savings growth, rising alternatives like mutual funds, small-saving schemes etc., and intense inter-bank competition, could pose challenges for deposit mobilisation at reasonable cost, Emkay said in its report.

Here, private sector banks are expected to lead the race, it said.

This is because, compared to public sector banks, private banks' growth is faster due to short-term retail loans, and higher LDR.

While banks have tried to fund this credit growth by reducing excess cash on balance sheet, most are now exhausted. Hence, banks are now left with little choice but to mobilise deposits, in order to incrementally fund credit growth.

Banks need to devise their own solutions in order to "survive the retail deposit war", the research firm said.

According to Emkay, some solutions include concentrating on expanding branch network, with a focus on the Hindi heartland; more focus on promoting steps like corporate salary, community banking, self-funding ratio; capturing corporate/SME customer flow via transaction banking/CMS and retail customer cash flow via wealth management and so on.

One of the most important ways to lead the retail deposit growth is expansion of branches. While digital banking is the future, the essence of deposit growth comes from physical branches.

According to Emkay's analysis, most private sector banks like HDFC Bank, ICICI Bank Ltd., Axis Bank Ltd. and IDFC First Bank are in active branch expansion mode. But public sector banks still lag due to multiple shocks in the past, like asset quality concerns, mergers and Covid-19.

In order to support deposit growth, the banking system will need to add branches at 5% CAGR and improve productivity of existing branches to bring the high LDR too, down to 75%.

"The need for branch expansion is expected to be around 20,000 odd across banks. Banks may need to incur this cost in near-to-medium term for long-term benefits," Dama said.

They also need to focus more on underbanked areas of Hindi heartlands like Uttar Pradesh, Bihar and Madhya Pradesh, by adopting a low-cost business correspondents model to unlock new areas of growth.

Accordingly, Dama expects RoAs for most banks to be in excess of 1% for some time.

In addition, banks may also need to transition into the role of wealth managers and offer services like broking, insurance distribution and allied private banking services. This would not just attract new customers but also arrest customer attrition, leading to increased market share in household deposits.

Tightening liquidity is due to the Reserve Bank of India's policy, according to Dama. "We expect RBI to ease liquidity in the system in next 12-15 months; may also cut CRR," he said.