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The banking sector has been struggling with slower growth in deposits compared to credit over the past few months. Latest data from the Reserve Bank of India (RBI) showed that while deposits grew at 11.7 per cent in the quarter ending in June 2024, bank credit rose at 15 per cent.
As the gap increases between deposits (which customers keep with the bank and get interest for) and credit (which the bank lends to customers at an interest rate charged from them), it creates an asset-liability mismatch for lenders.
The widening gap has concerned the government and the RBI, who have asked lenders to focus more on deposit mobilisation through innovative products. Here is why this divergence is being witnessed and what banks are doing to address the issue.
Weak deposit growth
In the quarter that ended in June 2024, bank deposits stood at 11.7 per cent, net of the merger of HDFC Ltd with HDFC Bank which came into effect from July 1, 2023. Including the impact of the merger of HDFC twins, deposit growth increased by 12.2 per cent in June 2024.
On the other hand, bank credit growth stood at 15 per cent, net of the merger, in June 2024, pointing to a higher credit-deposit gap.
The RBI’s recent data for the fortnight ended August 9 showed that bank credit growth continued to outpace deposit growth — advances rose 14 per cent and deposits grew by 11 per cent.
The outflow of household savings from banks to capital markets is one of the major reasons for a slower growth in deposits in the banking system.
After the Covid-19 pandemic, the Indian capital markets have seen a surge in retail activity through direct (direct trading) and indirect (using mutual fund route) channels. Higher returns, robust digital infrastructure which has eased the investment process and rapid smartphone penetration have facilitated the entry of more retail investors into capital markets.
Over the last year or so, Indian households have increasingly channelled their savings to capital markets. As per the Economic Survey 2023-24, the number of demat accounts with both depositories National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) rose from 11.45 crore in FY23 to 15.14 crore in FY24.
A rise in retail participation was more substantial and steadier through the indirect channel via mutual funds. The net AuM (assets under management) of the mutual fund industry grew by 6.23 per cent to touch a record high of Rs 64.97 lakh crore as of July 31, 2024.
The mutual funds segment presently has about 9.33 crore systematic investment plan (SIP) accounts through which investors regularly invest in schemes.
In July this year, RBI Governor Shaktikanta Das said that households and consumers who traditionally leaned on banks for parking or investing their savings are increasingly turning to capital markets and other financial intermediaries.
“While bank deposits continue to remain dominant as a percentage of financial assets owned by households, their share has been declining with households increasingly allocating their savings to mutual funds, insurance funds and pension funds,” Das said.
He said slower deposit growth compared to credit may “potentially expose the system to structural liquidity issues”. Das also urged banks to garner more deposits by leveraging their wide branch network and offering innovative products.
Last month, Finance Minister Nirmala Sitharaman said that banks need to take the old-fashioned route to bring back focus on mobilising small deposits and not just big deposits to reverse the flagging deposit growth rate.
With deposit growth slowing down, banks are racing to mobilise funds through special deposit schemes and other innovative plans to meet the credit demand in the system.
In the recent past, lenders such as State Bank of India, Bank of Baroda, Bank of India, Bank of Maharashtra, RBL Bank and Bandhan Banks have launched special retail deposit schemes.
SBI launched ‘Amrit Vrishti’, a scheme that offers 7.25 per cent interest on deposits for 444 days. Bank of Baroda also launched the ‘Monsoon Dhamaka’ deposit scheme, offering interest rates of 7.25 per cent for 399 days and 7.15 per cent for 333 days.
“For the current financial year, even though banks are looking to shore up their liability franchise, deposit tightness is likely to persist. Overall, India’s banking sector is striving to maintain a fine balance between maintaining strong credit growth and paying more for deposits to fund that growth, which is likely to keep the cost of funds elevated for banks,” according to a report by financial services company Nuvama.
