KOCHI: Banks have reportedly seen a fresh inflow of deposits as some small finance banks lowered deposit rates following the RBI clampdown on four NBFCs.
The recent RBI clampdown on NBFCs has prompted several small finance banks and other financial institutions to reduce their high rates on lending.
Small finance banks across the board are said to be lowering the high interest they have been paying to the depositors to attract funds to their institutions as they anticipate contraction in loan book.
It was recently, RBI imposed strict sanctions on four NBFCs – Asirvad Micro Finance, Arohan Financial Services, DMI Finance, and Navi Finserv – due to excessively high interest rates, non-transparent pricing policies, and practices like loan “evergreening” that complicated borrowers’ repayment abilities.
It’s silver lining for banks
“Every cloud has a silver lining,” remarked a top official with a public sector bank referring to the new trend stemmed from the RBI action on NBFCs.
The flow of deposits to the small finance banks commenced in large scale after some cooperative societies developed financial problems in the past few years, with several of their depositors losing money.
“These depositors lately identified small finance banks as their next ideal place to park their funds as they offered higher rates than the mainstream banks,” a small finance bank official told businessbenchmark.news.
“However, this euphoria is now reversing as the market trends shift. The trend will be more visible in the coming quarters when these small finance banks apply breaks on lending,” he added.
The tightening of RBI regulations on microfinance institutions (MFIs) has resulted in a slowdown in both loan and deposit growth in the sector.
The introduction of stricter norms targeting usurious interest rates and high processing fees has led to a reduction in disbursements across various MFIs, according to informed sources.
In the case of ESAF Small Finance Bank, while the gross loans fell marginally quarter-on-quarter in Q2, the micro loans, the bank’s mainstay, contracted by about 7 per cent during the period.
Banks stand to gain
The new trend is certain to help banks as the race for deposits will subside a bit for the time being. Banks have been going through a tough time struggling to match their deposit growth with the pace of growth in advances, which grew much faster.
As of Q2 2024, bank credit grew by 17.4 per cent, outpacing the 11.1 per cent growth in deposits.
Major private sector banks like ICICI and HDFC are experiencing this imbalance, with ICICI’s deposits growing by 10.2 per cent year-on-year in Q2 2024, while its loan book expanded by 17.8 per cent.
Similarly, HDFC’s loan growth was higher than its deposit growth, with loans up by 19 per cent while deposits grew at 13 per cent, exasperating its already high credit-deposit (CD) ratio.
