India's Banking Industry Needs a Complete Organizational Revamp

Banks running short of deposits to on-lend dampens economic activity but new ways exist for them to raise low-cost funds

- G.N. BAJPAI

Debates on the significant decline in India's GDP growth rate in the second quarter of 2024-25 and the revised estimates of growth for the year have been all over the media. The narratives have ranged from it being a secular decline to just a quarterly blip. Pundits have volunteered diagnoses and prescriptions accordingly. However, the trend of slower credit growth has received little attention; the why of it, even less so.

Credit growth as on 15 November was just 15%, compared to 20.6% last year. In fact, in the month of October 2024, rural credit slowed from 13.4% to 12.9%, non-food credit from 13% to 11.5%, industry credit from 8.9% to 7.9% and non-bank financial company advances from 9.5% to 6.4%. Credit growth has been sliding for several months.

For the year 2024, bank deposit growth is reported to be higher than loans sanctioned. But that was deliberate, aimed at bringing down the credit-deposit (CD) ratio, and was not enabled by a pick-up in deposit growth. After meeting Statutory Liquidity Ratio and Cash Reserve Ratio requirements, a healthy CD ratio works out to be between 65% and 75%. A lower sum of loans disbursed against the growth in deposits has pushed down the CD ratio to 78.9% for the fortnight ending 4 October 2024. Even now, the incremental CD ratio for the full year is 89.5%.