Deposit mobilization, challenge for higher banking provisions in FY24: report

Mobilizing required deposits without compromising on margins and increased provisions as the system transitions to a new loan provisioning model will be the main challenges facing Indian banking in FY24, a report said on Wednesday.

India Ratings and Research maintains its neutral outlook on the economy-important sector for the coming fiscal year, saying key financials are likely to continue to improve in fiscal 24 on stronger balance sheets, higher credit demand and more stable interest rates.

“Challenges facing the banking sector include mobilizing deposits while minimizing the impact on margins and provisions that could arise in the short to medium term due to the expected transition to the expected credit loss (ECL) system for provisions,” the domestic rating agency said .

It estimated deposit growth at a low 9-11 percent in FY24.

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Deposit repricing will continue to take place in a “competitive environment”, the agency said, noting that banks have drawn nearly Rs 5 billion in liquidity since March 2022, which has enabled cheap and steady deposit mobilization .

As banks grow their books at higher rates than in the previous five to seven years, some of the improvements in cheap deposits, particularly for public sector banks (PSBs), could reverse, it said.

Lending growth, which stood at 18.8 percent in December 2022, will continue to outpace deposit growth, which lagged at 11.8 percent in the same quarter, the agency said, adding that this will continue to push deposit rates higher.

The carryover of RBI’s rate hikes is reflected in both lending and deposit rates, which rose 2 percent, it said.

Banks are also resorting to the opportunistic use of wholesale deposits, including large deposits, to meet demand for loans, the agency said.

The draft framework for banks’ ECL (expected credit loss) has the potential to trigger structural changes in credit pricing and credit distribution, particularly in segments that have not traditionally performed flawlessly, it said.

There will be a “manageable impact” on lenders’ capital buffers, the report said, adding that banks may seek to pass on additional provisioning costs to end-borrowers via pricing.

The impact on banks would be asymmetric due to different inputs to the ECL model, portfolio concentration and orientation, product mix, assumption of macroeconomic expectations and many other factors, it said.

Lenders may also face operational challenges in providing data with relevant history in the form and form required for the ECL models.

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