MC Interview | Suresh Ganapathy of Macquarie expects deposit rates and funding costs to rise significantly, especially for NBFCs, in the next 6 months


“The biggest challenge for the banking sector is funding constraints. Deposit growth is way below loan growth and that can be the biggest constraint for loan growth,” Suresh Ganapathy of Macquarie Group told Moneycontrol in an interview.

Given this, Macquarie Group sees a very tight funding market, and expects deposit rates and funding costs for all players, especially NBFCs, to rise significantly in the next six months, says Ganapathy, Head of Financials Research (India). He has over 15 years’ experience in the financial sector.

Ganapathy says Macquarie continues to prefer private sector banks over PSUs, as they will grow faster, are better in terms of technology, and will continue to grab market share from PSU banks.

Do you expect significant credit growth in the banking space in the coming years, and if so, why?

The long-term credit growth multiplier has been 1.2-1.3x nominal GDP growth. So, if nominal GDP growth is around 12-13 percent, we can see 15-16 percent credit growth sustain. Credit growth well beyond that is critically dependent on the capex expansion plans of the private sector and that’s where there are several challenges.

Banks also this time around are cautious in financing greenfield projects.

Do you see any kind of challenges for the banking space in the medium term?

The biggest challenge is funding constraints. Deposit growth is way below loan growth and that can be the biggest constraint for loan growth in our view. So, we do see a very tight funding market and expect deposit rates and funding costs for all players, especially NBFCs, to significantly inch up in the next six months.

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Most experts are bullish on the prospects of the banking & financial services space over the next 3-5 years. Are you in the same camp? Also what is your preference among private and PSU banks?

Yes, that is because we are likely to see steady loan growth, and more importantly, on the asset quality front, the banking system’s health is the best it’s been in the last 10 years. Also banks are now very well capitalised with the CET1 ratio for the system at 13 percent.

The preference continues to be private sector banks, as growth will be faster, they are better in terms of technology and they will continue to gain market share from PSU banks.

What kind of earnings growth do you expect for the segment in the coming years?

Around 18-20 percent is easily sustainable. The sector is a strong power of compounding story.

The Reserve Bank of India delivered a rate hike along expected lines in its September policy meeting. Do you expect another 100 bps rate hike in the upcoming policy meetings given the expectations that the Fed may remain aggressive in hiking rates?

I guess a lot will depend on inflation and currency outcomes. If inflation indeed is going to be around 5 percent by, say, April to June 2023, as per RBI expectations, a terminal repo rate of 6.5 percent implying a real rate of 150 bps is adequate. Meaning: another 50-60 bps rate hike from the current levels.

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Do you expect a major consolidation in the banking and financial services space in the coming year?

To some extent consolidation is inevitable. Weaker PSU banks and weaker old private sector banks are strong target candidates for the acquirers and we do expect consolidation to pick up pace. Ultimately the winners will continue to be larger banks and they will only get larger over the longer term.

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