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.
“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.
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…
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