Mint Explainer: Behind the worst bank deposit crunch in nearly 20 years

Data from the Reserve Bank of India (RBI) showed the credit-deposit ratio or CD ratio—the percentage of the bank deposit base being utilized for loans—at its highest since 2005 as loan offtake rose across categories, including home loans and other loans for consumption. 

Mint takes a look at how banks performed on the deposit front and why their CD ratio hit a nearly 20-year high.

What kind of growth did banks see in deposits and loans in FY24?

The pace of growth of bank credit surpassed deposit growth in FY24, as per data from the RBI. In FY24, while deposits grew 13.5% to ₹204.8 trillion, non-food credit grew 20.2% to ₹164.1 trillion as on 22 March. In FY23, deposits grew 9.6% and credit 15.4%. Non-food credit is bank credit after adjusting for loans given to the Food Corporation of India (FCI). 

Anil Gupta, senior vice-president and co-group head of financial sector ratings at Icra Ltd said that a part of mobilised deposits also is allocated towards regulatory requirements like cash reserve ratio (CRR) and statutory liquidity ratio (SLR). As a result, the lendable funds left with lenders are lower, resulting in increased competition in deposit mobilisation. SLR is the proportion of deposits that banks have to mandatorily invest in approved securities, while CRR is the percentage of deposits banks need to park with RBI.

Has the merger of HDFC Ltd with HDFC Bank made a difference to the overall credit-deposit numbers?

The credit and deposit growth in FY24 would have declined to 16.3% and 12.9%, respectively, if additions owing to erstwhile mortgage lender Housing Development Finance Corp. (HDFC) and HDFC Bank’s merger on 1 July were not considered. The merger led to HDFC’s loans and deposits becoming part of the banking system, adding nearly ₹7.2 trillion in loans and ₹1.5 trillion in deposits to the banking system from 1 July.

What does the CD ratio say about the banking system?

At 80%, the credit-deposit or CD ratio is at its highest since 2005, from when this ratio was available, showed data from RBI. Had it not been for the HDFC-HDFC Bank merger, the CD ratio for FY24 would have been 78% and even then the ratio would have been at an eight-year high. The FY24 data is up to 22 March, the last fortnight for the previous financial year. The next set of data on credit and deposit is expected to be released for the fortnight ending 5 April. 

According to Subha Sri Narayanan, director, Crisil Ratings, a high CD ratio, in the absence of funding sources other than deposits, could limit the ability of lenders to grow at the pace they otherwise could, or impact profitability in case of continued deposit rate hikes to meet credit growth. 

Over the last few quarters, Narayanan said lenders utilised their excess SLR and supported credit growth despite the lower deposit growth. With SLR buffers now having come down, banks are likely to walk the tightrope between growing their deposit base through further deposit rate hikes and protecting profitability, she said. Mint reported in January that banks were liquidating some of their investments in sovereign securities to fund an insatiable demand for loans.

Are banks turning too competitive when it comes to attracting deposits?

Apart from competition among themselves to garner more deposits and support credit growth, banks are also faced with the challenge of more investors tapping the equity markets seeking better returns. 

Bhavik Hathi, managing director of consulting firm Alvarez and Marsal said customers are chasing high-return equity-linked products. As per the Association of Mutual Funds in India or Amfi, investment inflows in mutual funds hit a 22-month high in January 2024 and net equity inflows rose 28%. 

The solid performance of equity markets in the last few months and with rising financial literacy, investors tend to invest in such securities for higher returns, said Hathi.