Bank deposits decline as lenders reduce costly bulk funds

Indian banks have pulled back on expensive bulk deposits, contributing to a contraction in aggregate deposits during the fortnight ended August 15. Deposits declined by ₹6,534 crore as lenders adjusted their funding strategies in response to changing liquidity conditions and rising costs associated with bulk deposits.

The shift reflects a broader recalibration by banks seeking to optimize their liability management. High-cost bulk deposits, typically offered at premium rates to attract large sums from institutional and corporate clients, have become less attractive as alternative funding sources gain traction. Foreign currency non-resident account deposits have emerged as a preferred avenue, providing banks with cheaper access to foreign exchange while reducing reliance on costlier domestic bulk funds.

Credit extended by banks fell more sharply, declining by ₹70,639 crore during the same fortnight, outpacing the contraction in deposits. This widening gap has eased pressure on the banking system's lending capacity, reflected in the credit-deposit ratio moderating to 81.72 per cent from previous levels.

The movements underscore banks' ongoing efforts to manage spreads and profitability in an environment of volatile interest rates and evolving deposit composition. The decline in bulk deposits, while reducing the immediate funding base, appears aligned with lenders' preference for more stable and cost-effective funding sources as they navigate monetary conditions and regulatory guidelines.