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The Big Deposit Crunch That Spells Trouble For Indian Banks And The BSE

By AltG Investment Research Lab

Photo of India's Bank Deposits Going Down

Here are the latest headlines across India's Top Newspapers:

  1. Mint Explainer: Behind the worst bank deposit crunch in nearly 20 years

  2. Banks' CD ratio at decadal high but deposit growth slowly outpacing credit growth, shows data

  3. Indian Banks Face A Big Deposit Crunch: Report

As the retailisation of consumer and financial markets happens in India, banks face a challenge in getting deposits, thereby creating structural reasons why roll-up platform equity will outperform banks and NBFC equity over the next decade in India.

What Is The Big Problem?

  • The Big Picture is that Indian banks and NBFCs (Non-Banking Financial Companies) are struggling to attract depositors in an increasingly competitive market. 

  • The big picture is that over the last four decades, banks and NBFCs have taken in deposits and financed pretty much everything, from corporates to infrastructure to consumer credit. 

  • However, the current crunch in deposit sourcing means deposit rates must increase. 

Why Is The Cash Crunch Indian Bankers Worst Nightmare?

  • Essentially, Banks and NBFCs in India were able to have attractive net interest margins given the flood of deposits that they enjoyed over the last three decades as incomes rose. The equity in these banks and NBFCs was undoubtedly a stellar investment, barring the odd corporate governance issue.

  • Buying banks and NBFCs and enjoying the investment returns has been quite a favourite trade with both retail and PE investors.

The Future Of Banking In India:

  • There are structural changes sweeping through India's economy that will compress net Interest Margins for Banks and NBFCs. 

  • But what's changed? Over the last thirty years, consumer behaviour has changed from a generation of savers to rapid instant consumers.

  • While the Indian Central Bank has withdrawn liquidity from the system, the main reason, a trend that we foresee continuing, is a young consumer market that consumes, invests, and spends its money as opposed to its far more risk-averse parents.

Why Does Dalal Street Need To Pay Attention NOW?

  • Indian Bank and NBFC equity valuations are in for a structural shift lower even as credit demand expands in the economy.

  • However, the excess spending that young consumers indulge in is showing up on corporate balance sheets and will continue to do so.

  • As bank credit gets tightened up, a real opportunity emerges for the entire ecosystem around acquiring and lending to medium-sized businesses that banks will increasingly struggle to lend to.

  • Most importantly, this sets the stage for massive consolidation, especially in industries without traditional "tangible" assets that banks can lend against.

  • If it's an intangible pick-and-shovel play, there's a significant investment return to be made

Disclaimer: In the article "The Big Deposit Crunch That Spells Trouble For Indian Banks And The BSE" above - Any views, comments or communication (above or in the past) should not be construed to be investment advice by Alternative Growth (hereafter referred to as “AltG”) in any form whatsoever. AltG does not make an offer to sell or solicit to buy any securities.


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