If deposits are stuttering, how will banks manage the credit boom?
₹2.64 trillion through CDs in the June quarter alone, accounting for about 30% of new deposits. This dependence on CDs, while growing, remains below levels seen in previous credit booms. For instance, between November 2010 and March 2011, facing a similar credit-deposit gap, banks raised ₹5 trillion through CDs, which was double the amount of deposits added during that period.
Second, the current deposit growth rate, although slower, is closer to its long-term trend, indicating a more sustainable trajectory. This contrasts sharply with 2007, when deposit growth exceeded 25% for several months, and the 2017-2019 period, when it dipped below 10%. The 'deposit franchise' of banks—their ability to attract and retain low-cost deposits—is extremely valuable.
This value is derived from the type and ownership of the deposits they attract, as well as their capacity to maintain these deposits even as interest rates fluctuate. The greater the share of low-cost current and savings accounts (CASA), the greater the value of a bank’s deposit franchise. This is particularly crucial for deposits held by individuals or small businesses, since sophisticated corporate depositors can shift funds swiftly, a truth that was brought home last year when rapid withdrawals by Silicon Valley Bank’s high net-worth customers precipitated its collapse.
In response to the current lag in deposit growth, public sector banks are offering higher rates on fresh term deposits than private sector banks. This can strengthen their ‘deposit franchise’ by increasing the share of household deposits in their portfolio, while also leveraging their reputation as government-backed institutions designed to serve the common people. For banks, procuring funds to lend away
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