Where is that Rs 100 deposit going?

The incremental credit-to-deposit ratio reached 116 percent by the end of January 2023.

Latest RBI data shows that loans are growing faster than deposits, leaving lenders scrambling to bridge the gap. During April-January of FY2023, banks collected Rs 12.53 lakh crore as deposits but loaned out Rs 14.50 lakh crore, the data shows.

In addition to the deposits they receive, banks borrow money from the market to meet the demand for loans. This is why the incremental credit-to-deposit ratio reached 116 percent by the end of January 2023.

When resources are scarce, their allocation becomes critical for profit-making. For banks, lending the money collected through deposits to segments that give a high return but with manageable risk is important.

It helps to see where deposits are flowing as credit to the real economy. Banks continue to hawk retail loans aggressively, but lenders have also begun to offer loans to small businesses and even large companies to capture the investment cycle uptick that is in the works. The way banks lend has changed after the pandemic.

Flow of funds

As said earlier, banks garnered deposits worth Rs 12.53 lakh crore during April-January FY23 but they lent Rs 14.50 lakh crore as loans.

The gap between the two was bridged through borrowings. At the same time, banks continued to invest part of their deposits in government bonds. This combination is partly mandatory and partly a risk-based decision.

During the first 10 months of FY23, banks invested 37 percent of deposits in government bonds, corporate bonds and other approved securities, which is reflected in the investment-to-deposit ratio. The rest flowed back into the economy as loans. This is reflected in the credit-to-deposit ratio.

As of January-end, the outstanding deposits of the banking sector were Rs 177.19 lakh crore and outstanding loans stood at Rs 133.42 lakh crore. This gives a credit-to-deposit ratio of 75.3 percent, based on the outstanding pile. As the above chart shows, out of Rs 100 deposit, Rs 37 went into investments and the rest as loans.

Who got the deposits?

So, where did deposits mobilised eventually go? Out of every Rs 100 deposit, Rs 14.07 went to agriculture while just Rs 10.58 went to industry for building and running factories.

Banks are relooking at their farm loan portfolio, given the emerging threat of El Nino on agriculture. While companies have started borrowing more, as seen by the corporate loan growth of many big lenders, they are yet to increase substantially. This could also change as the private investment cycle gains more traction.

A big amount -- Rs 37 -- went towards services, such as transport, trade, non-bank finance companies, real estate and so on. In short, banks preferred to lend to shops, restaurants, airlines, tour operators, salons and other service providers as they are ramping up after the pandemic.

The consumption of services has surged, giving service providers enough reasons to borrow for running their business.

The largest share of deposits found its way back into households as retail loans. The share of these loans was a little over 45 percent in the overall loan portfolio of the banking system. In other words, out of every Rs 100 deposit, banks lent Rs 45 as retail loan during April-January.

Within retail loans, home loans got a big share. In fact, Rs 10 out of every Rs 100 of deposit was lent for buying homes while Rs 2 went for purchasing vehicles.

The pandemic has also made a difference to the composition of lending.

As the above chart shows, a large part of deposits went into investments during the April-January period of FY20, before the pandemic hit in March. Banks parked Rs 47.23 of every Rs 100 deposit into safer government bonds given the lack of lending opportunities. That said, retail loans continued to have a large share, with Rs 36.85 of every Rs 100 deposit going towards funding purchase of homes, cars, consumer durables etc. Services lost out and just got a mere Rs 2.18 per Rs 100 of deposit as loans.