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Central bank policy highlights strained loan-to-deposit ratios
● The RBI’s review of monetary policy highlighted the strained
incremental loan-to-deposit (LDR) ratio of the system, clearly
stating that the current trajectory is unsustainable. Specifically,
due to strong credit growth (running 24% YoY) and muted deposit
growth (running 17% YoY), the incremental LDR (over the past 12
months) has been over 100%. Consequently, overall system loanto-
deposit ratio rose to 76 % in Dec’10 (71 % in Dec’09)
● The RBI has stated, going forward, it will monitor the incremental
credit-to-deposit ratios of banks and will “engage with” banks that
show an abnormal incremental credit-to-deposit ratio.
● We expect banks to raise deposit rates further to mobilise
deposits and address the strained LDRs. This should put pressure
on NIMs going forward.
● This is consistent with our view that banks’ NIMs will come under
pressure, as deposit rates rise further and the incremental deposit
mix shifts towards term deposits. Banks with a stronger deposit
franchise and relatively low LDRs are better placed (HDFC Bank,
ICICI, J&K Bank).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Central bank policy highlights strained loan-to-deposit ratios
● The RBI’s review of monetary policy highlighted the strained
incremental loan-to-deposit (LDR) ratio of the system, clearly
stating that the current trajectory is unsustainable. Specifically,
due to strong credit growth (running 24% YoY) and muted deposit
growth (running 17% YoY), the incremental LDR (over the past 12
months) has been over 100%. Consequently, overall system loanto-
deposit ratio rose to 76 % in Dec’10 (71 % in Dec’09)
● The RBI has stated, going forward, it will monitor the incremental
credit-to-deposit ratios of banks and will “engage with” banks that
show an abnormal incremental credit-to-deposit ratio.
● We expect banks to raise deposit rates further to mobilise
deposits and address the strained LDRs. This should put pressure
on NIMs going forward.
● This is consistent with our view that banks’ NIMs will come under
pressure, as deposit rates rise further and the incremental deposit
mix shifts towards term deposits. Banks with a stronger deposit
franchise and relatively low LDRs are better placed (HDFC Bank,
ICICI, J&K Bank).
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