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Moderation in credit growth, easing of liquidity in the banking system and profitability pressure will see banks slashing theirdeposit rates across tenures by 50-75 bps. In 2012-13, deposits are expected to register a 14-15 per cent growth in line withcredit growth.

Deposit growth to remain at 14-15 per cent by March 2013

- What is the projected growth in deposits in 2012-13?- What would be the share of CASA and term deposits?--

Oct 19, 2012

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Deposits growth to hover around 14-15 per cent as credit demand moderates

Despite a 75-100 bps increase in interest rates on fixed deposits across tenors in 2011-12, deposits grew at the slowest pace in a

decade, by 13.4 per cent as of March 2012. With real interest rates on bank deposits and small savings instruments remaining

relatively low on account of the persistently high inflation and lacklustre stock market, households favoured investments other

avenues.

Banks supplemented deposits with alternative sources of borrowings by way of debt instruments and Liquidity Adjustment Facility

(LAF) of the RBI. Following this, the average fortnightly issuance of certificate of deposits (CDs) increased during March 2012. The

effective interest rates offered on CDs touched 11.1 per cent at the end of March 2012, ascompared with 9.9 per cent at the end of

March 2011.

During the period from April-August 2012, banksmobilised nearly Rs 1,700 billion in incremental deposits, butlent only about Rs

170 billion.Given the comfortable liquidity position of banks and their recentrate rationalisation, CRISIL Research expects deposit

rates to stay at current levels as the incremental demand for funds moderate. Consequently, deposit growth will be limited to 14-15

per cent by the end of March 2013.

Deposit growth

P: Projected

Source: RBI, CRISIL Research

CASA deposits to declineTerm deposits recorded strong growth during the first three quarters of 2011-12mainly on account of the rising opportunity cost of

holding cash or demand deposits as interest rate on term deposits provided attractive returns. However, during the fourth quarter of

2011-12, growth in time deposits slowed down due totight liquidity conditions.

Trend in modal deposit interest rates

No part of this Report may be published/reproduced/distributed in any form without CRISILs prior written approval.

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Source: RBI, CRISIL Research

The share of current account balance has also begun to shrink as companies do not want their funds lying idle in these accounts.

Moreover, the quantum of transactions in current accounts has come down due to the lacklustreperformance of the equity

marketsas these accounts are primarily used for settlement purposes in capital market transactions.

Further, owing to technological advances, customers have been increasingly transferring their savings account balances beyond a

pre-specified level to term deposits to earn higher interest income (there is a considerable difference in interest rates on

savingsaccountsand fixed deposits).

Proportionate distribution of deposits

P: Projected

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Source: RBI, CRISIL Research

Moreover, the finance ministry has also come out with a directive for all public sector banks to reduce their dependence on bulk

deposits by capping their proportion in overall deposits to 15 per cent. To substitute for these deposits, banks will have to keep theinterest rates on retail deposits attractive. As a result, we expect CASA (Current Account and Savings Account)ratio to drop

marginally to 33 per cent by the end of March 2013 from 34 per cent as of March 2012.

Methodology to project deposit growth

CRISIL Research has forecast the growth of retail deposits based on the following factors such as:

GDP growth

Employment

Per capital income

Growth in disposable income

Rate of inflation

Interest rates

Taxation

Opportunity cost of investments in other avenues

Methodology to project deposit growth

No part of this Report may be published/reproduced/distributed in any form without CRISILs prior written approval.

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Source:CRISIL Research

No part of this Report may be published/reproduced/distributed in any form without CRISILs prior written approval.

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