India’s central bank chief plays down fears of a deposit crunch

Despite widespread bullishness on India, with its stock market highs and healthy bank balance sheets, a shortage of deposits is causing some uneasiness in the country’s financial sector.

Speaking to CNBC in an exclusive interview, Reserve Bank of India (RBI) Governor Shaktikanta Das discussed the issue of slowing growth in bank deposits underperforming an expansion in loans. 

There is not cause for concern currently, Das said, but there could be trouble ahead if the situation persists.

“So there is a gap of 350 to 400 basis points,” he said, referencing the difference between credit and deposit growth. Annual figures from August put loan growth at 13.6% with deposit growth at 10.8%, according to Reuters.

“If it persists, then naturally the ability of the banks to continue their lending will get affected,” Das added in the interview Friday.

When lending outpaces deposits, net interest margins — or the difference between what a bank earns on loans and pays out for deposits — take a hit. This could have ramifications for share prices, with many global institutional investors owning shares in Indian banks. In severe cases, it can lead to liquidity issues for banks if they have trouble meeting withdrawal demands.

Das noted that the loans could be being deposited elsewhere, remaining in the banking system, and wouldn’t be drawn on the money that might be finding its way into potentially riskier investments, such as debt funds or equity markets.

“If people are going into the capital markets, it is their decision … we have nothing to say on that,” he said.

Das added that there was scope for banks to increase their deposits, however. “I am happy to note that most of the banks are today really working on their drawing boards, and they are working on coming out with new products for deposit mobilization.”

Speaking on the same subject, Ashish Gupta, CIO at Axis Mutual Fund, said he sees a muted earnings picture for Indian banks compared to the last two years — partly due to this credit-deposit gap.

“I think that is clearly going to be visible. You will see earnings growth for the banks slow down,” he told CNBC’s Street Signs Asia.”

He backed the view that deposit growth would be slower compared to the last couple of years, and highlighted that future rate cuts by the RBI would also have a negative impact on banks’ profit margins.

India’s GDP slowed to 6.7% in the second quarter compared to last year’s 8.2%, piling pressure on the central bank to reverse a recent hiking cycle. Markets are currently pricing in a near-95% chance of a rate cut at the RBI’s December meeting, with less conviction for the next meeting in October. Das highlighted there will be new members of the Monetary Policy Committee at its October meeting.

“We will discuss and decide in the MPC, but so far as growth and…