Lacklustre deposit increase holds back credit

Slowing deposit growth due to declining interest rates have resulted in banking sector deposits growing by 12.4% in 2014 against loan growth of 13.7%. 

Even though this is a growth of 18% when compared with 2013 it is unlikely to promote significant growth in 2015, Asia Securities stated in its report. With statutory deposit and liquidity requirements, the larger banks had to borrow to cater to the credit growth due to lack of branch expansion opportunities. However, smaller banks who did not have an island wide presence and successfully executed their expansion plans secured an above average deposit growth, the report observed. 

“Our channel checks indicate that the optimum level of branches to have an efficient presence in the country is around 220-250, which Commercial Bank and HNB have reached and recorded an average deposit and credit growth,” it said. 

Sampath Bank in the meantime, with a lower branch network, recorded and above average deposit and credit growth following its branch expansion strategy lending to excess liquidity, which was then utilised to settle part of its foreign borrowings in 2014.         

Asia Securities also recommends banks should raise additional capital to cater to increasing banking activities with economic growth. Currently the country’s banking industry is fairly capitalised to its assets with a bank capital to asset ratio of 8.2%, broadly in line with its regional peers.