CRISIL SEES HIKE IN DEPOSIT RATES AS CREDIT DEMAND PICKS UP

Credit rating agency Crisil said it expects sharper hikes in deposit rates in the second half of FY-2011 on the back of strong expectations of a healthy pick up in credit demand.

Lending rates are seen firming up gradually in response to the regulatory measures and a tighter liquidity scenario.

The deposit rate hikes could be accentuated if the central bank announces any further rate hike in the second half, the agency said in a statement.

Though the Reserve Bank of India has raised the repo and reverse repo rates by 100 and 150 basis points, respectively, primarily in response to inflationary pressures in the economy, Crisil pointed out that deposit rates have, however, risen, on an average, by only 50 basis points in the first half of FY-2011.

Clearly, the increases in benchmark rates are yet to be fully transmitted to the deposit rates. The firming of interest rates, according to Mr Suman Chowdhury, Head-Crisil Ratings, has begun to gather momentum with several banks increasing both their deposit and lending rates in the first week of October 2010.

The deposit rates – at 6.50 to 7.75 per cent for tenures up to a year – among scheduled commercial banks are modest, and given the steady high inflation, translate into negative real interest rates.

Clearly, the deposit rates will need to be more attractive for inflows to revive. Deposit rates could go up by about 50 basis points across tenures in the second half, said Mr Chowdhury.

Pointing out that buoyancy in the economy will translate into strong growth in credit offtake for banks, the rating agency said the moderate increases in base rates announced by banks recently underscores the general expectation that the momentum in credit offtake will pick up in the last two quarters of the year.

Credit growth

Aggregate bank credit has grown by 4.3 per cent (not annualised) or around Rs 1,40,000 crore during the first five months ended September 10, 2010.

Though credit growth is higher than the growth of 1.3 per cent witnessed in the corresponding period of the previous year, it is lower than the expectations of the banking industry, which continues to target an overall credit growth of 20 per cent in FY-2011.

In FY-2011, aggregate deposits have grown by a mere 3.9 per cent (non-annualised) during the five months through August 2010, compared to 6.5-per cent growth in the corresponding period of the previous year.

The current credit growth has been funded comfortably by current accretions to deposits, without material changes to the system's credit-to-deposit ratios.

Credit offtake

“We believe that credit offtake will be substantially higher in the second half of 2010-11.

This is because credit demand in India is by nature back-ended, given the festive and agricultural harvest seasons in the second half of each year.

“Moreover, banks have sanctioned loans to a slew of large infrastructure projects, which have obtained the necessary approvals and mobilised equity, and may now begin to draw down loan,” said Mr Chowdhury.

Moreover, steady growth in the Index of Industrial Production (IIP) indicates that the manufacturing sector may soon look to put capital expenditure programmes on fast track, and need increased funding to meet working capital requirements.

Source: http://www.thehindubusinessline.com/2010/10/12/stories/2010101252350400.htm