The country’s lenders are increasingly turning to short-term debt instruments to meet the soaring demand for loans. Certificates of deposits (CDs) issued by banks have reached a 12-year high of ₹4.3 trillion ($51.4 billion) as of July 12, according to data from the Reserve Bank of India (RBI).
Loan growth has outpaced deposit growth, putting pressure on banks’ liquidity.
Credit expansion has accelerated to 17.4% in the year to June 25, surpassing the 11% growth in deposits. This mismatch has forced banks to seek alternative funding sources.
The central bank chief has warned about the potential risks associated with interest rate volatility and liquidity management challenges due to the shift in savings preferences towards financial markets.
Analysts believe that banks will continue to face deposit growth challenges in the near term.
Stiff competition for deposits, despite higher interest rates, has prompted banks to explore other avenues for funding. Meenal Joshi, a credit analyst at Bloomberg Intelligence, expects deposit growth to remain sluggish in the short term.
To bridge the funding gap, banks have resorted to various measures.
Some banks have increased deposit rates, while others like HDFC Bank have focused on selling loan portfolios. Additionally, banks have tapped the local bond market to fund infrastructure and affordable housing projects.
Higher reliance on short-term borrowing could impact banks’ profitability.
Sournyaji Niyogi, director at India Ratings & Research, warns that the cost of funds through CDs is generally higher than deposits, potentially affecting banks’ net interest margins.
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