Indian Banks Face Liquidity Risks Amid Credit-Deposit Disparity

S&P Global Market Intelligence warns of significant liquidity risks for Indian banks due to a widening gap between credit and deposit growth. This gap is driven by households shifting to high-return investments. Increased deposit rates are compressing net interest margins, leading to slower dividend growth and profitability.

The banking sector in India could confront 'significant' liquidity risks owing to the widening gap between credit and deposit growth, according to S&P Global Market Intelligence. Households shifting their savings to high-return investments predominantly drive this disparity, explains Tusharika Aggarwal, a research analyst at S&P Global Market Intelligence.

S&P Global Market Intelligence, a financial information and analytics firm, highlights that dividend growth at several of India's largest banks is anticipated to decelerate, following a surge during the financial year that ended in March 2024.

Aggarwal notes that some banks' efforts to elevate deposit rates to mitigate the credit-deposit imbalance are squeezing net interest margins. 'This compression is expected to result in slower dividend growth and tighter profitability as banks grapple with increased costs linked to attracting deposits,' she adds.

Dividends are portions of a company's profits distributed to shareholders, albeit not mandatory. According to S&P Global Market Intelligence, dividends at six major Indian banks are projected to grow by 9% in 2024-25, compared to a 27% growth rate in the previous fiscal year. These banks include State Bank of India, HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, and IndusInd Bank.

Of these, Axis Bank and HDFC Bank are forecasted to slash dividends by 15% and 9%, respectively. Amid concerns over the widening credit-deposit growth gap, Indian banks are deploying attractive schemes to boost deposits, as customers increasingly opt for high-yield investment assets like stocks and mutual funds.

Finance Minister Nirmala Sitharaman, in a recent meeting with public sector bank heads, suggested that while credit growth is on the rise, deposit mobilization needs enhancement to sustainably support this growth. She urged banks to intensify efforts to attract deposits through special drives and innovative products. (ANI)

(With inputs from agencies.)