Scramble for deposits to push up banks’ costs: CRISIL
Profitability might suffer, but ratings are stable

The scramble to keep pace with credit growth will push up banks’ cost of deposits by 50 basis points in 2007-08, according to CRISIL. This is after an increase by 60 basis points in 2006- 07 to 5.1 per cent. While there has been an increase in low-cost current account and savings account (CASA) deposits over the past few years, costs have increased due to changes in the composition of term deposits.

CRISIL’s analysis of the banking sector reveals that the proportion of bulk deposits (deposits above Rs.10 million), which carry higher interest rates and have relatively shorter tenors, has increased over the past five years. More than half of the term deposits mobilised in 2007 had tenors of less than one year, as against less than a third in 2000, resulting in frequent deposit renewals and thus exposing banks to interest rate risk.

According to Tarun Bhatia, Head – Financial Sector Ratings, CRISIL “Several banks were able to fund their credit growth during the past couple of years by selling their excess statutory liquidity ratio (SLR) investments. However, this may no longer be feasible, given that the average SLR is currently estimated at 28 per cent, just 3 per cent above the threshold limit, thanks to the race among banks to increase business.”

Incidentally, despite the 60-basis-point increase in the cost of deposits, the banks’ net profitability margin (NPM) increased to 1.55 per cent in 2006-07 from 1.32 per cent in 2005- 06, as banks passed on the increase in costs to their borrowers. In CRISIL’s opinion, banks are unlikely to be able to pass on increasing costs to borrowers in 2007-08, as further increases could significantly hamper growth or force borrowers to look at alternate avenues. Many corporates have increased their reliance on foreign currency borrowings as the overall cost is much lower.

CRISIL’s analysis also reveals that the overall capital adequacy in the system is likely to improve by around 10 basis points post implementation of the revised guidelines on capital adequacy in line with Basel II norms. The revised guidelines released recently by the Reserve Bank of India link a bank’s capital to the estimated degree of risk associated with its borrowers. Public sector banks are expected to gain significantly from the norms as they have a large exposure to higher-rated (AAA, AA, A) borrowers.

In this environment, CRISIL believes that the credit indicators of its portfolio of rated banks will continue to be stable.

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