India’s deposit surpasses credit growth after 30 months of reversal

For the first time in two and a half years, deposit growth in Indian banks has exceeded credit growth, as banks shift their focus toward strengthening liquidity. The loan-to- deposit ratio in the banking sector has reached its lowest point in 30 months, reflecting a cautious approach encouraged by regulators. The slowdown in loan growth comes as banks focus on increasing deposits, a strategy that may compress profit margins as they offer higher interest rates to attract funds.
Indian banks are responding to regulatory measures with a more conservative lending strategy. Recent directives from the Reserve Bank of India (RBI) aim to balance credit and deposit growth, addressing concerns over liquidity and sustainability in the sector. According to data compiled by CareEdge Ratings, during the fortnight ending October 18, 2024, deposits grew at a faster rate than loans—an occurrence not seen since February 2022. Year-on-year, deposits rose by 11.8%, while credit grew by 11.7%,according to report.
Credit and deposit growth have moderated recently, with credit growth slowing significantly by 8 percentage points compared to the previous year, while deposit growth eased by 1.6 percentage points. Experts attribute the slowdown in credit growth to the RBI’s updated guidelines on risk weights and its recommendations to reduce reliance on certificates of deposits (CDs), which are expected to make credit offtake more sluggish in the coming year. Despite this, banks have focused on increasing deposit mobilization, which has risen by Rs17.3 lakh crore to Rs.218.1 lakh crore as of October 18, 2024, an 8.6% increase from Rs.200.8 lakh crore in December 2023. This has become a priority for banks, as they seek to enhance their liability portfolios, with many turning to certificates of deposit as an additional funding source.
While credit demand has grown by Rs.12.7 lakh crore to Rs.172.4 lakh crore, primarily driven by sectors like mortgages, MSMEs, and commercial real estate, challenges in credit growth have arisen due to a higher base effect and caution in unsecured lending, alongside RBI's recent policies. Experts believe the shift toward deposit growth will help banks navigate economic uncertainty, positioning them for more stable, sustainable growth in the future.

(Business Correpondent)