Credit, deposit growth gap narrows to 18-month low in September

bank deposit

The gap between credit and deposit growth in the banking system narrowed to an 18-month low of 176 basis points in September, the Reserve Bank of India (RBI) data shows. This could be due to some pull back by banks on loan growth and their push to raise deposits, analysts said.

The lower spread indicates that banks are not over-sweating or stretching their deposits base to fund and support loan growth. Recent efforts to increase focus on deposit mobilisation may have also resulted in a favourable spread.

“Deposit growth picked up modestly, supported by the acceleration in demand deposits, while even time deposits continued to grow strongly,” Anand Rathi said in a report.

The last time the spread was lower was on May 6, 2022, when it was around 124 basis points.

One basis point is one hundredth of a percentage point.

According to the RBI data, deposit growth remained at 11.34 percent and bank credit grew 13.1 percent as on September 20.

Garnering deposits has been a tough ask for banks in the past 12-18 months. Deposit growth has been slower compared to credit growth.

The increase in gap between deposits and credit can potentially create an asset-liability mismatch for banks, which has been a point of concern for the government and the RBI.

Both have been nudging banks to focus more on deposit mobilisation through innovative products.

Motilal Oswal Financial Services in its report said that systemic credit growth declined to 14.2 percent from 16.4 percent in FY24, mainly driven by slower deposit growth and an elevated CD ratio.

Several banks, especially private banks, have reduced their credit growth guidance, while state-owned banks have largely maintained their guidance.

Continued moderation in unsecured retail and slower corporate credit off-take will further impact credit growth in the banking system, the report said.

Deposit growth has hovered in a narrow range of 11-13 percent over the past 14 months and is up 2.8 percent year-to-date (YTD).

The systemic CD ratio remains elevated at 79.6 percent and most banks have seen their CD rise over the past year, it said.

In the second quarter of the current financial year, JM Financial expects a 14.4 percent on-year growth in loans (14.7 percent for private banks and 13.9 percent for state-owned banks) and 11.2 percent in deposits (15.3 percent for private banks and 9.0 percent for PSBs).

“Cost of deposits continue to inch up albeit at a more gradual pace than seen previously and we also believe that system is possibly reaching a peak in deposit rates, as system credit and deposit growth has converged meaningfully,” the JM Financial report said.