Deposit Growth Becomes Key Test for Indian Banks

Indian banks are in a fairly comfortable position today when we look at asset quality, capital levels and liquidity. But one thing I feel we need to track closely from here is whether deposits can keep pace with the strong growth in lending. Credit growth was around 19.3% while deposits grew about 15.4% in July. This difference has pushed the credit-to-deposit ratio above 82%. The number itself may not be alarming, but if this gap keeps increasing, banks will eventually have to find other sources of funding to support loan growth. For me, this is where individual bank selection becomes important. Two banks may be growing their loan books at similar rates, but the quality of that growth can be very different depending on how comfortably they are able to raise deposits. Banks can use wholesale funding or instruments like FCNR deposits to bridge the gap, but relying too much on alternative funding can increase funding costs and eventually put pressure on margins. So while the banking sector looks fundamentally strong at present, I would not look at loan growth alone. Deposit growth, credit-to-deposit ratio and funding costs are equally important numbers to track. The banks that can grow their deposits alongside their loan books should be better placed if liquidity becomes tighter later.