Banks are in a tight spot as deposit growth falls further, loan growth goes up

The slowdown in deposit growth in banks continued and hit a 50-year low, causing problems for the banking sector.

On the contrary, the loan growth is on a growth trajectory after five-year low.

Now, if the trend continues likewise, banks will have to increase the deposit rates and even government borrowings could get costlier.

As per the RBI, banks are lowering proportion of their government bond holdings owing to increase in lending.

The credit-to-deposit ratio has also surged to 77.6% in March 2016, pointing out that banks are lending a bigger portion.

"Retail loans have been the largest contributor to bank credit growth in the past one-two years. In the past couple of months, corporate working capital borrowings through commercial paper have partially reverted to banks (due to falling gap in their respective interest rates)," Saugata Bhattacharya, chief economist Axis Bank, told ET.

These factors may also affect transmission of rate cuts.