Edelweiss:: WSS - Deposit growth sees momentum post in the increase in the rates by banks; non foo d off take remains robust

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Our observations: Tracking Investment and Credit
 Cash and lending by the banking system, as observed in the Weekly Statistical
Supplement (WSS) for the fortnight-ended February 25, can be stated as below:
1. M3 growth drops to 16.50% during the fortnight compared to 16.90%
on the previous fortnight, due to the higher base effect. On an absolute basis
the M3 increased by INR 517bn over the fortnight, mainly on account of the
healthy increase in the time & demand deposits. Reserve money saw a rise of
INR 107bn over the fortnight (currency in circulation component increased by
INR 48bn) leading to a marginal improvement in the multiplier to 4.97x.
2. SLR investment increased by INR 148bn over the fortnight compared to
a decline of INR102bn in the previous fortnight. Banks have maintained an
excess SLR of ~3.50% (adjusted for repo borrowing) for the fortnight.
However with a GoI borrowing of INR 3.43trn in FY12 and a sluggish growth in
the deposits, banks will have to dig into their excess SLR reserves to cater the
off take demand. Investment to Deposit ratio improved marginally to 29.21x
but significantly lower than the average of 30.80x reflective of the pressure on
banks to fund credit growth through excess SLR investment.
3. Deposit growth floated around the 16.40% level compared to 17% in the
previous fortnight. Banks managed to mobilize INR 417bn of incremental
deposits for the fortnight as the lag effect (after a series of rate increase by
banks to make deposits more attractive) started to kick in. In order to achieve
the target deposit growth of 18% for FY11, banks have to mobilize another
INR2.10trn in the month of March-11 (YTD mobilization at INR 5.97trn). With
persistently high inflation, banks are unlikely to achieve the target set by RBI.
4. Non food off take continues to be buoyant clocking in 23% growth for the
fortnight. The overall credit disbursed by SCBs so far in FY11 stood at INR
38.10trn, 23.21% higher than the outstanding credit of INR 30.92trn
outstanding a year ago. On an absolute basis the credit off take increased by
INR 259bn compared to 493bn during the previous fortnight mainly on
account of the sharp rise in the cost of borrowing. Credit to deposit ratio for
the SCBs eased marginally to 74.95 compared to 75.06 in the previous
fortnight due to a slower credit off take growth in the fortnight. However at
the pace credit is growing, banks will have to garner additional deposits of at
least another INR 3.50trn so as to maintain its CD ratio under 75. Given that
SCBs have managed to achieve an average growth of 12% per annum in the
incremental deposits for the last four years, this will put upward pressure on
the interest rates.
 Issuance of short term instruments remain strong during the fortnight as banks
borrowed heavily through CDs in order to roll over their maturing instruments as
well as meet the off take demand. Over the fortnight banks issued CDs amounting
to INR 267bn taking the outstanding CDs to INR 3.77trn.