Opinion Why the gap between bank credit and deposits is worrying

In recent weeks, both Finance Minister Nirmala Sitharaman and RBI Governor, Shaktikanta Das, have raised the issue of the gap between deposit and credit growth of banks. The latest data from the RBI shows that as on July 26, 2024, deposit growth stood at 10.6 per cent, while credit growth was at 13.7 per cent. The credit to deposit ratio has been around 80 per cent since September last year. This divergence has prompted banks to increasingly rely on other sources of funding — issuance of certificates of deposits has amounted to Rs 3.49 lakh crore so far in this financial year, “significantly higher” than the Rs 1.89 lakh issued over the same period last year as per data from the RBI’s recent state of the economy report. A greater reliance on short-term non-retail deposits, as RBI Governor Shaktikanta Das noted in his comments on the recent monetary policy committee, “may potentially expose the banking system to structural liquidity issues”.

For banks, current and savings accounts (CASA) are a low cost source of funds. The greater the CASA book, the higher their net interest margins tend to be. However, the shift away from low cost deposits makes banks more sensitive to interest rate movements. This trend is being observed in both the public and private sector, in varying degrees. Challenges on the funding front have been linked to other investment avenues which are becoming a more lucrative proposition for households. However, as per an analysis by economists at the Bank of Baroda, the causal relationship between mutual funds and bank deposits is not clear. The gap can also be due to changes in currency in circulation and interventions in the currency market. Such episodes of diverging credit and deposit growth have in the past persisted for two to four years, with the average duration of these cycles being 41 months as per the most recent RBI financial stability report.

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Higher credit to deposit ratios could prompt competition among banks for deposits. As per a report in this paper, banks are now resorting to special deposit schemes and innovative plans to mobilise funds. This could in turn drive up their funding costs, and have implications for their margins. Banks may align their credit with their deposit growth. With credit offtake moderating, as per a CareEdge Ratings report, there may be some indications of this.