Bank deposits lag loan growth

Slower deposit growth versus loans could significantly strain banks’ liquidity and asset-liability management

- Anshika Kayastha & Subhana Shaikh

Indian banks’ growth in deposits kept pace with loans in the first quarter of the fiscal year but slipped in the second, returning to the trailing trend seen in the last two years, provisional numbers for Q2, the quarter ended September, show.

This may spell funding challenges for banks but could be good news for depositors.

When deposits grow slower than loans over a prolonged period, it could lead to liquidity and asset-liability mismatch challenges for lenders. Given that banks rely on deposits for cheap funds, this widening gap would push them towards other sources. Customers might benefit, though. When deposits are scarce, banks tend to raise deposit rates to attract funds.

For the broader banking system, credit growth was at 10.4% as on 19 September, per Reserve Bank of India’s data analyzed by Care Ratings. Deposits rose 9.5% from a year ago in the same period. In a report on 6 October, Care Ratings attributed the slower growth to a likely decline in bulk deposits. As a result, the credit-deposit (CD) ratio rose to 80.3%, crossing the 80% mark for the first time in six months.