Bank deposits: Barking up the wrong tree?

Despite efforts to boost deposit growth, credit growth is outpacing deposits. Traditional strategies are not working. Are we missing the big picture?

- TAMAL BANDYOPADHYAY

What do Finance Minister Nirmala Sitharaman, Reserve Bank of India (RBI) Governor Shaktikanta Das, and Financial Services Secretary Vivek Joshi have in common? All three are concerned about the slow deposit growth in the banking sector. The industry is facing one of its toughest challenges in raising deposits to keep up with credit growth.

As of July 26, the deposit portfolio of all scheduled commercial banks stood at 211.93 trillion, while credit reached 168.14 trillion. So far this financial year, deposit growth has been 3.5 per cent, compared to a 2.3 per cent increase in credit. However, over the past year, deposit growth has been 10.6 per cent, significantly lower than the 13.7 per cent growth in credit.

Around the same time in 2023, the year-on-year deposit growth was 12.9 per cent against a 19.7 per cent increase in credit. In 2022, the figures were 9.2 per cent and 14.5 per cent, respectively.

When deposit growth lags behind credit growth, banks end up with a higher credit to deposit (CD) ratio. For every 100 in deposits, banks must keep ₹4.5 with the RBI as a cash reserve ratio, and another ₹18 is invested in government bonds.

Theoretically, this leaves banks with ₹78.5 for every ₹100 deposit to lend. In reality, the amount is often lower due to higher investment in bonds. Of course, banks can use capital to lend.

In mid-July, the average CD ratio of the banking system was 79.39 per cent, down from 80.25 per cent in midMarch. However, some banks — both universal and small finance banks continue to report a CD ratio above 100 per cent.

When deposit growth is slow, banks must raise money from the market in the form of commercial papers (CPs) and certificates of deposit. In FY24, banks raised ₹9.56 trillion through certificates of deposit, 31 per cent higher than the 7.28 trillion raised the previous year. Such funds are costlier, and CPs, in particular, have a short tenure.