Credit-Deposit Ratio Falls Marginally, HDFC Merger Pushes Credit Growth By CareEdge Ratings
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Synopsis
• Credit offtake continued to show robust growth, increasing by 19.7% year on year (y-o-y) to reach Rs. 148.0 lakh crore for the fortnight ending July 28, 2023. This surge continues to be primarily driven by the impact of HDFC’s merger with HDFC Bank, as well as growth in personal loans and NBFCs. Meanwhile, if merger impact is excluded, credit grew at a lower rate of 14.7% y-o-y for the same fortnight.
• Deposits too witnessed healthy growth, increasing by 12.9% y-o-y for the fortnight (including the merger impact). On a pro forma basis, deposits grew by 12.3% y-o-y during the same period. The growth in deposits has not been at the same pace as credit since the larger proportion of liabilities of HDFC was by way of borrowings rather than just deposits.
• The outlook for bank credit offtake remains positive, with a projected growth of 13-13.5% for FY24, excluding the merger's impact.
• Deposit growth is expected to improve in FY24 as banks look to shore up their liability franchise and ensure that deposit growth does not constrain the credit offtake.
• The Short-term Weighted Average Call Rate (WACR) stood at 6.39% as of August 04, 2023, compared to 4.72% on August 05, 2022. Banking system liquidity remained in surplus through the month, at an average monthly surplus of around Rs 1.7 lakh crore in July. A temporary provision of incremental cash reserve ratio for SCBs was introduced to manage liquidity, CareEdge Economics expects this new measure to absorb liquidity worth Rs 1 lakh crore from the system which is also likely to impact short term rates.
Bank Credit Growth Remains Elevate
Figure 1: Bank Credit Growth Trend (y-o-y %, Rs. Lakh crore)
• Credit offtake increased by 19.7% year on year (y-o-y) and a sequential improvement of 0.3% for the fortnight ended July 28, 2023. It is important to note that the y-o-y figures are not directly comparable, as the data reported by the RBI as of July 28, 2023, includes the impact of the merger of HDFC with HDFC Bank. Excluding the impact of the merger, the growth stood at 14.7% y-o-y for the fortnight, compared to 14.5% in the previous year. This growth was primarily driven by continued demand for personal loans and NBFCs. In absolute terms, credit offtake expanded by Rs. 24.3 lakh crore to reach Rs. 148.0 lakh crore as of July 28, 2023, compared to July 29, 2022.
• The outlook for bank credit offtake remains positive, supported by factors such as economic expansion, increased capital expenditure, the implementation of the PLI scheme, and a push for retail credit. CareEdge estimates that credit growth is likely to be in the range of 13.0%-13.5% for FY24, excluding the impact of the merger of HDFC with HDFC Bank. The personal loan segment is expected to perform well compared to the industry and service segments in FY24. However, elevated interest rates and global uncertainties could potentially impact credit growth in India.
Figure 2: Bank Deposit Growth (y-o-y %)
• Deposits rose at 12.9% y-o-y for the fortnight (reported July 28, 2023) and by 0.7% sequentially. Without considering the merger, deposits rose by 12.3% y-o-y. Meanwhile, in absolute terms, bank deposits expanded by Rs. 22.0 lakh crore and reached Rs. 191.7 lakh crore as of July 28, 2023, compared to July 29, 2022. The growth in deposits has not been at the same pace as credit since the larger proportion of liabilities of HDFC was by way of borrowings rather than just deposits.
• In July, banking system liquidity remained in surplus at an average monthly surplus of around Rs 1.7 lakh crore. GST outflows and RBI’s intervention via variable rate reverse repo auctions saw excess liquidity shrink. Surplus liquidity conditions in the fiscal year so far are also in part reflective of healthy government spending. However, a temporary provision of incremental cash reserve ratio for SCBs was introduced to manage liquidity, CareEdge Economics expects this new measure to absorb liquidity worth Rs. 1 lakh crore from the system.
Figure 3: Credit to Deposit (CD) Ratio Trend –Includes Merger Impact
• The CD ratio has been generally hovering above 75% since December 2022. The CD ratio saw a decline of 40 bps compared to the previous fortnight and stood at 77.2% in the fortnight (July 28, 2023). However, y-o-y growth was approx. 440bps. (Impacted due to HDFC merger).
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