Industry
A credit boom that raised concerns is now cooling
Summary
- Experts said that regulatory actions for higher outflow rates on retail deposits, higher risk weights for certain loan segments will continue to drive slower growth for the rest of the period in this financial year.
Mumbai: Credit growth that leapt far ahead of deposit growth has slowed, narrowing the gap between the two, as regulatory measures take effect and banks dial down a loan frenzy.
The difference between non-food credit and deposit growth shrank from 311 basis points on 26 July to 275 bps on 23 August, latest data from the Reserve Bank of India (RBI) showed. While credit growth stood at 13.6% year-on-year on 23 August, deposits grew 10.8% in the same period.
Experts said RBI measures such as higher outflow rates on retail deposits – requiring banks to set aside more liquid assets to account for sudden increase in retail deposit outflows– and higher risk weights for certain loan segments will continue to slow credit growth during the rest of the financial year.
“While credit growth will remain slightly higher than credit growth, we expect the gap between the two to narrow down, driven by a slowing-down of credit growth," saidAnil Gupta, senior vice-president and co-group head of financial sector ratings, Icra Ltd. “Slower growth in credit is aligned with the regulatory objective to address the potential liquidity issue which may arise in the banking system if the gap continues to persist," Gupta added.
Worried banks, RBI
Credit growth overshooting deposit growth had worried banks and the regulator alike. RBI governor Shaktikanta Das said in July that while there will always be some gap between the two, credit growth should not “run ahead of deposit growth by miles". However, though the regulator wants banks to launch new products and use branches to attract more deposits, it can only persuade them to do so since it give up fixing deposit rates almost three decades ago, Mint reported on 17 August.
Also read: Amid the worst deposit crunch in two decades, RBI urges banks to adjust to changes in how people save
In November, the RBI clamped down on surging collateral-free loans, which are difficult to recover when borrowers default. The regulator raised risk weights on consumption loans, credit card exposures, and loans to non-bank financiers by 25 percentage points each, hoping that higher capital consumption would brake rapid growth.
This worked. The annual rate of growth in personal loans slowed to 13.6% on 26 July, from 28.1% in July 2023. Since the beginning of FY25, it has slowed to 2.1%, from 8.6% from the same period last year.
According to Subha Sri Narayanan, director, Crisil Ratings Ltd, while there are periods where credit growth outpaces deposits growth, this differential does not persist for several years continuously and the two tend to converge. As per Crisil analysis, the differential between credit growth and deposit growth narrowed to 280 basis points (bps) in fiscal 2024 from 500 bps in fiscal 2023.
“With banks actively tapping alternate funding sources, and also utilizing a portion of their excess SLR (statutory liquidity ratio) funds, it is possible that the growth differential between credit growth and deposit growth, albeit narrowing, may continue over the next couple of quarters," said Narayanan.
Bankers concur. Amitabh Chaudhry, chief executive of private sector lender Axis Bank told reporters in July that system credit growth will moderate and converge towards deposit growth of around 13% over the fiscal.
Also read: Large banks see deposit, credit slow down from March, smaller peers better off
The chief financial officer of a bank who did not wish to be named said he does not see festive season spending hurting the convergence of credit and deposit growth.
Outpacing credit
On an absolute basis, deposit growth has already outpaced credit, a sign that the gap will narrow down the line. As on 23 August, fresh net addition of non-food credit y-o-y was at ₹20.2 trillion, while deposits grew ₹20.8 trillion in the same period.
Madan Sabnavis, chief economist, Bank of Baroda said credit growth outpacing deposit growth is not unusual as it was witnessed in FY23 and FY24; moreover, on a year-to-date basis, growth in deposits was higher at 4.1% against 3.1% in credit.
“At the system level, it does appear that there is surplus in the system as recorded by RBI’s daily statements on net surplus, which is in the region of ₹1.5-2 trillion. The interesting aspect is that on a YTD basis till 23 August, deposits increased by ₹8.49 trillion while incremental credit and investments were ₹5.13 trillion and ₹2.59 trillion, respectively," said Sabnavis.
Sabnavis added that incremental borrowings by banks were at ₹1.33 trillion as on 23 August, which explains the surplus liquidity in the system. “Therefore, a conclusion is that it is possible that some banks have large surpluses while others are targeting deposits to meet the demand for credit," he said.
