Motilal Oswal Report: Indian Banks’ Loan-to-Deposit Ratio to Stabilize Soon
New Delhi, India – A recent report by Motilal Oswal, a financial service company, suggests that the loan-to-deposit (LD) ratio in Indian banks is likely to stabilize in the coming months. This comes amid concerns raised by the finance minister and the RBI governor about the depleting LD ratio and its potential risks to financial stability.
Current LD Ratio
The report highlighted that the Indian banking sector’s LD ratio stood at 77.2% as of August 9, 2024. This is slightly below its recent peak of 78.2% on March 22, 2024, and its all-time high of 78.8% in September 2013. Typically, a rising LD ratio is associated with tightness in the banking sector, potentially indicating overheating. However, the report suggests that the current rise in the LD ratio does not indicate tightness and is not a cause for immediate concern.
Deposit Growth
The report also addressed concerns over weak deposit growth, stating that these concerns may be overstated. Historical data shows that bank deposits grew at an average rate of 9.5% during the pre-COVID period (January 2015 to February 2020) and 10.4% in the post-COVID period (March 2020 to August 2024). As of August 9, 2024, deposits increased by 10.8% year-on-year.
Suggestions for Improvement
Finance Minister Nirmala Sitharaman has urged state-run banks to enhance deposit mobilization through attractive offers and by focusing on Tier-2 and Tier-3 cities. The report suggests that deposit growth could be increased by making other asset classes less attractive through taxation or interest rates, or by boosting fiscal spending to increase net credit to the government.
Alternatively, policymakers might consider curtailing loan growth to lower the LD ratio. However, this could slow deposit growth, particularly if corporate credit growth remains weak. Encouraging savers to shift investments from other assets to bank deposits could also be an option, but this carries risks of overreach and potential damage to economic confidence.
Future Outlook
As fiscal spending increases, bank credit to the government is likely to grow, which should elevate deposits and broad money supply. However, the extent of foreign capital inflows and the RBI’s policy for managing these inflows remain uncertain.
Doubts Revealed
Motilal Oswal -: Motilal Oswal is a company in India that provides financial services like stock trading, investment advice, and research reports.
Loan-to-Deposit (LD) Ratio -: The Loan-to-Deposit Ratio is a number that shows how much money banks have loaned out compared to how much money they have in deposits. A higher ratio means more loans compared to deposits.
Stabilize -: Stabilize means to become steady or not change much. In this context, it means the LD ratio will stop going up and down a lot.
77.2% -: 77.2% is a percentage that shows the current Loan-to-Deposit Ratio. It means that for every 100 rupees in deposits, 77.2 rupees are given out as loans.
Peak -: Peak means the highest point. Here, it refers to the highest LD ratio that was recently recorded.
Deposit Growth -: Deposit growth means how much the money people put in banks is increasing over time.
Year-on-Year -: Year-on-Year means comparing data from one year to the same time in the previous year. For example, comparing August 2024 to August 2023.
Finance Minister Nirmala Sitharaman -: Nirmala Sitharaman is the person in charge of India’s finances and economy. She makes important decisions about money and banking in the country.
Deposit Mobilization -: Deposit mobilization means encouraging people to put more money into banks.
Asset Classes -: Asset classes are different types of investments, like stocks, bonds, or real estate. Making other asset classes less attractive means making these other investments less appealing so people put more money in banks.
Fiscal Spending -: Fiscal spending is when the government spends money on things like building roads, schools, and hospitals. Boosting fiscal spending means increasing this kind of spending to help the economy.