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SBI’s report highlighted that historically, there have been episodes where credit and deposit growth diverged for 2 to 4 years. Photo: Bloomberg
Amid concerns from the Reserve Bank of India (RBI) about the slow pace of deposit growth and the risks of credit growth trailing behind deposits, SBI Research reported on Monday that incremental deposit growth, at Rs 61 trillion, has exceeded incremental credit growth of Rs 59 trillion since FY22.
“Thus, the notion of flagging deposit growth appears to be merely a statistical myth, with credit growth outpacing deposit growth being portrayed as a deceleration in deposit growth,” the report noted.
According to the latest RBI data, as of July 26, bank credit grew 13.7 per cent year-on-year (Y-o-Y), while deposits grew 10.6 per cent Y-o-Y during the same period.
SBI’s report highlighted that historically, there have been episodes where credit and deposit growth diverged for 2 to 4 years. Currently, we are in the 26th month of credit and deposit divergence, and this cycle could end between June and October 2025. “Beyond this period, deposit growth could inch up, and credit growth may decelerate significantly, signalling a rate reversal cycle. A slowdown in growth to some extent appears likely,” the report stated.
The report also cautioned that the stability of savings bank deposits could be an issue, as they are now primarily used for transaction purposes, mostly for UPI transactions. Additionally, the banking system is witnessing a decline in current account savings account (CASA) deposits due to the decline in savings bank deposits. CASA deposits have decreased to 41 per cent in FY24 from 43.5 per cent in FY23.
While CASA deposits are declining, term deposits have been driving the compositional shift in bank deposits: the share of term deposits in total deposits has risen to 59 per cent in FY24 from 56.5 per cent in FY23. “On an incremental basis, term deposits accounted for nearly 78 per cent of the total deposits in FY24, while the share of CASA deposits has declined from their 2023 levels. This shift is expected, as in an increasing interest rate scenario, CASA funds move to term deposits,” the report said.
According to the report, the deposit growth problem must be viewed from three perspectives: growth in reserve money, leakages, and regulatory dispensation.
The growth of reserve money declined to 5.6 per cent Y-o-Y in March 2024, compared to 7.8 per cent a year ago, which could be due to the decline in currency in circulation (CIC) to 3.9 per cent in FY24, compared to 7.8 per cent in FY23. “The yearly growth of reserve money in the last two financial years is lower than the decadal average growth. This may be one of the reasons for the low deposit growth, as base money is not increasing. Additionally, growth in reserve money creates a supply of money in the economy through the money multiplier,” the report said.
The report also highlighted that banks garnered deposits worth Rs 24.3 trillion in FY24, of which 55 per cent came from households (~Rs 14.1 trillion). However, there are leakages from deposits in various forms, as well as deposits being appropriated, rendering them unavailable for discretionary commercial lending by banks. “Based on our calculations, the leakages from the system could be around Rs 7.5 trillion under the base case scenario, of which Rs 2.1 trillion could be due to tax on interest income on deposits (Rs 76,000 crore) and self-assessment tax (Rs 1.29 trillion),” the report stated.
Furthermore, the report noted that in the last two years, the RBI has tightened several guidelines to ensure banks maintain sufficient liquidity to handle sudden cash outflows. Consequently, the systemic liquidity coverage ratio (LCR) declined by approximately 17 per cent to 130 per cent in March 2024, from 147 per cent in March 2022.
“With the new LCR guidelines on digital banking channels, which may become effective from April 1, 2025, there could be a short-term impact on credit growth,” the report added.
First Published: Aug 19 2024 | 1:49 PM IST
