Deposit Mobilisation, Higher Provisions Challenge For Banking In FY24: Report

Mobilising required deposits without compromising on margins and the heightened provisions as the system shifts to a new model of loan provisioning will be the key challenges for Indian banking in FY24, a report said on Wednesday. Maintaining its neutral outlook on the important sector for the economy for the upcoming fiscal year, India Ratings and Research said the key financial metrics are likely to improve further in FY24 on stronger balance sheets, higher credit demand and more stability in interest rates.

"The banking sector's challenges include mobilising deposits while minimising the impact on margins, and provisions that could emerge in the near-medium term on account of the expected transition to the Expected Credit Loss (ECL) regime for provisions," the domestic rating agency said. It estimated the deposit growth to come at a low 9-11 per cent in FY24. Deposit repricing will continue to happen in a "competitive environment", the agency said, pointing out that banks have drawn on almost Rs 5 lakh crore of liquidity since March 2022, which has enabled reasonably priced and evenly paced deposit mobilisation.

As banks grow their books at higher rates than seen in the preceding five to seven years, some of the improvements in low-cost deposits could reverse especially for public sector banks (PSBs), it said. Credit growth, which stood at 18.8 per cent as of December 2022 growth, will continue to race ahead of deposit growth that lagged at 11.8 per cent in the same quarter, the agency said, adding that this will keep pushing up deposit rates. Transmission of RBI's rate hikes is playing out into both the lending and deposit rates, which are up by 2 per cent, it said.

Banks are also resorting to using wholesale deposits including bulk deposits opportunistically to meet the demand for lending, the agency said. The draft framework for banks' ECL (expected credit loss) has the potential to bring structural changes in loan pricing and credit dissemination, especially to segments that have traditionally not demonstrated a pristine performance, it said. It will have a "manageable impact" on the capital buffers of the lenders, the report said, adding that banks could attempt to pass on additional provisioning costs to end-borrowers through pricing. The impact on banks would be asymmetric on account of varying inputs to the ECL model, portfolio concentrations and focus, product mix, take on macroeconomic expectations and many other factors, it said. The lenders can also face operational challenges in terms of making data with relevant history available in shape and form required for the ECL models.