Bank deposits grow faster than credit in Nov 2011

Deposit growth has outpaced the credit growth as on Nov 25, 2011. In Nov, the credit growth grew at 17.62% on a YoY basis, which was the lowest in the calendar year. On the other hand, deposits grew by 18.17%, which was the highest in 2011. This was on the back of sluggish economic growth and attractive interest rates that banks are offering investors.

The RBI's motive was to increase savings among individuals and reduce spending, so that inflation cools off. With higher interest rates, individuals opted for making higher deposits in banks, rather than taking loans due to higher cost of borrowings. This has lead to a slowdown in the credit offtake, which will affect growth prospects.

The following graph shows the credit and deposit growth in CY 2011:

Source: RBI

Deposit growth has shown good growth in this year, on the back of attractive interest rates being offered by banks. Fixed Deposits for  the tenure of one year in Nov 2010 offered approximately 7%, which is now approximately up by 200 bps to 9%. In an uncertain equity market, investors try to play safe and get the best returns possible. Fixed Deposits are among the investments that have shown good growth during this period. On a YTD basis, the total term deposits with banks grew at approximately 15.68%.

On the other hand credit growth has slowed its pace due to lower demand from corporates, which are postponing their current expansion plans on the back of an uncertain macro environment. The Index of Industrial Production (IIP) is also showing dismal growth numbers. This is evident from the fact that the Sept 2011 IIP figure came in at a mere 1.9%, declining by 420 bps on a YoY basis and 170 bps on a sequential basis.

The RBI has projected deposit growth at 15.50% and credit growth at 18% for FY12. We believe that deposit growth will be above the RBI's projection, as the interest rate in the near term is not expected to come down. On the other hand, banks may face tough times in achieving the credit growth of 18% for FY12.

The RBI is to lay out its monetary stance on Dec 16 2011, which will provide further provide guidance for the economy. We, at DSIJ, feel that the RBI will take a pause in rate hikes, as inflation is showing signs of cooling. This is evident from the food inflation number for the week ended Nov 26, 2011, which declined by 140 bps to 6.6%. With the dues of advance tax payment (Dec 15, 2011) and banks, which are continuously borrowing higher under the Liquidity Adjustment Facility (LAF), we expect the RBI to cut Cash Reserve Ratio (CRR), which will ease the liquidity pressure of the banks.