Amid the worst deposit crunch in two decades, RBI urges banks to adjust to changes in how people save

A wide gap between higher borrowings and sluggish bank deposits—making for the worst deposit crunch in two decades—has the Reserve Bank of India concerned about the potential impact of a structural change in how people save.

While Indian banks have been struggling to attract deposits, customers have been borrowing heavily to buy homes and for other purposes. The credit-deposit ratio in the banking system is at its highest in at least 20 years, Mint reported in April.

“It goes without saying that there will always be some gap between the two, but credit growth should not run ahead of deposit growth by miles,” RBI governor Shaktikanta Das said at an event on Friday, urging banks to formulate strategies to address such shifts. 

“This may potentially expose the system to structural liquidity issues,” Das said.

As on 28 June, bank deposits had grown 11.1% year-on-year, lagging credit growth of 17.4%. Banks have been raising deposit rates to lure customers who seem to have found other investment avenues. 

Also read | Behind the worst bank deposit crunch in nearly 20 years

“It is, of course, recognized that almost every loan creates a new deposit in the borrower’s name or adds to his or her account balance. In other words, money begets money in the banking system,” said Das, adding that there needs to be a reasonable balance between credit and deposit growth.

“While there could be a debate regarding ‘deposits funding loans’ vis-à-vis ‘loans funding deposits’, the current regulatory concern stems from the fact that there could be structural changes happening which banks need to recognise and, accordingly, devise their strategies,” said Das. 

The other avenues

According to the RBI governor, households and consumers who have typically been parking funds with banks are increasingly turning to capital markets and other financial intermediaries. 

Das pointed out that even as bank deposits still dominate in terms of the share of financial assets owned by households, their share has been declining with customers increasingly allocating their savings to mutual funds, insurance funds, and pension funds.

“To be precise, households are increasingly turning to other avenues for deploying their savings instead of banks,” he said.

That said, net financial assets of Indian households have been declining consistently—from 11.5% of gross domestic product (GDP) in 2020-21, to 7.2% the following year and plummeting to 5.1% in 2022-23, RBI data show. 

Also read | It is easier than ever for Indians to borrow now. So why aren't they spending more?

Net financial assets are calculated by deducting financial liabilities from overall financial assets. Household liabilities include loans from banks and non-banking financial companies (NBFCs), among others, while assets include bank deposits, investments in financial institutions, life insurance, provident fund, currency, and other investments. 

Mint reported in September that Indian household savings had reached decadal lows with surging inflation forcing people to dip into their savings and avail loans for their spending requirements.

Enhanced vigil on delinquency levels

Das said on Friday that banks have sought to fill the credit-deposit gap by increasing their reliance on sources such as short-term borrowings and certificates of deposit (CD). 

“This increases their sensitivity to interest rate movements and poses challenges to liquidity risk management,” said Das. “The shift in deposit preferences from current account and savings account (CASA) deposits has various implications which banks need to keep in mind.” 

Also read | Banks tap gilt kitty on red-hot credit demand

Speaking on unsecured loans, or borrowings not backed by collateral, Das called for enhanced vigil on delinquency levels and leverage in small-ticket consumer loans.

While the boards of banks and NBFCs are to fix limits on unsecured exposures, RBI supervisory teams have found that some have fixed very high ceilings, even where they already have high exposures. 

“While it is not our intention to be prescriptive on such matters, banks and NBFCs are expected to show prudence and avoid exuberance,” said Das. 

In November, RBI raised risk weights on consumption loans, credit card exposures, and loans to non-bank financiers by 25 percentage points each, hoping that higher consumption of capital would decelerate such rapid growth. 

“These measures appear to have led to a certain degree of moderation in the targeted segments, as observed in our recent Financial Stability Report,” said Das.

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