The growth of gold loans in India's banking sector reached 83% year-on-year in October, significantly higher than the growth of core retail credit, despite some declines in monthly disbursements, according to a report published by a reputable financial institution.
Performance of Gold Loans and Banking Credit
The report indicates that despite a decrease in gold loan disbursements on a monthly basis, this sector continues to register strong annual growth and acts as a key driver in the expansion of banking credit. Overall, credit growth in the banking system reached 18.2% year-on-year in October, while deposit growth declined to 16.7% as of October 15. Additionally, lending to non-banking companies, small and medium enterprises, and large corporations has also increased, contributing to credit expansion.
Impact of Interest Rate Fluctuations
The report also mentions the high volatility of security yields, which may lead to increased reliance of companies on bank loans until market conditions stabilize. This situation could strengthen lending to corporate borrowers. Furthermore, credit growth continues to outpace deposit growth, with the credit-to-deposit ratio in the banking system reaching 81.6%. The credit-to-deposit ratio was around 88% last year.
However, non-resident foreign currency deposits (FCNR) have helped improve the deposit situation of banks. According to the report, FCNR deposits have contributed about 450 basis points to deposit flows, reducing the gap between credit growth and deposits by 150 basis points. This gap is expected to narrow further given the high loan base in the second half of the fiscal year.
The report predicts that banks will have sufficient liquidity space to support credit growth of about 200 basis points more than deposit growth in fiscal year 28, supported by deposit supply trends and appropriate liquidity coverage ratio levels. Additionally, the utilization of these extra deposits could increase the loan-to-deposit ratio of banks compared to fiscal year 26 levels, aiding net interest income growth, even if this utilization does not improve net interest margins.
The report also highlights the differences between public and private banks in transmitting interest rate changes. While the transmission of repo rate changes on repo-linked loans is expected to be generally similar, public banks may require more time to transmit and reduce a lesser proportion of rate changes through their MCLR rates compared to private sector lenders.
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