Gridlocked in a crunch?

India's banking sector is grappling with its worst crisis in a decade, as liquidity shortages, rupee depreciation, rising NPAs, and stock market volatility strain credit supply, despite RBI's concerted interventions to stabilise the economy

- DIPANKAR DEY

The Indian banking system is facing the worst crisis of the decade due to severe liquidity crunch, steep depreciation of Indian currency against US dollar, declining bank deposits, volatility in stock market, high non-performing assets and worsening credit-deposit ratio. A Bloomberg Economics Index revealed that cash deficit on January 23, 2025 was recorded at Rs 3.3 lakh crores (or USD 38.2 billion), which is the highest level since at least 2010. According to reports, the situation is so acute that the daily variable repo rate (VRR) auctions—a short-term liquidity adjustment tool employed by the RBI to supply funds to the banking system—has not been of much help to ease the situation.

Adverse impact on economy

Liquidity crunch is adversely impacting the economy for the last few months. As per the findings of the Trans-Union CIBIL Credit Market Indicator (CMI) report, India's retail credit growth continued to moderate in the quarter ending September due to a general cooling in the rate of credit demand growth and a decrease in credit supply across most loan products. The CMI is a comprehensive measure of data elements that are summarised monthly to analyse changes in credit market health, categorised under four pillars: demand, supply, consumer behaviour, and performance. These factors are combined into a single, comprehensive indicator. The CMI for September 2024 was 100, lower than 103 in September 2023. While the indicator has remained consistently above 100 since September 2022, the cooling in credit demand along with the contraction in credit supply has led to continued moderation.