Debates on the significant decline in India’s GDP growth rate in the second quarter of 2024-25 and the revised estimates of growth for the year have been all over the media. The narratives have ranged from it being a secular decline to just a quarterly blip. Pundits have volunteered diagnoses and prescriptions accordingly. However, the trend of slower credit growth has received little attention; the why of it, even less so.
Credit growth as on 15 November was just 15%, compared to 20.6% last year. In fact, in the month of October 2024, rural credit slowed from 13.4% to 12.9%, non-food credit from 13% to 11.5%, industry credit from 8.9% to 7.9% and non-bank financial company advances from 9.5% to 6.4%. Credit growth has been sliding for several months.
For the year 2024, bank deposit growth is reported to be higher than loans sanctioned. But that was deliberate, aimed at bringing down the credit-deposit (CD) ratio, and was not enabled by a pick-up in deposit growth. After meeting Statutory Liquidity Ratio and Cash Reserve Ratio requirements, a healthy CD ratio works out to be between 65% and 75%. A lower sum of loans disbursed against the growth in deposits has pushed down the CD ratio to 78.9% for the fortnight ending 4 October 2024. Even now, the incremental CD ratio for the full year is 89.5%.
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Such high ratios leave very little room to meet emergency capital requirements. Banks have been relying on short-term borrowings like certificates of deposit, etc, to meet the gap between loans disbursed and deposits. This gives rise to low-lying systemic risk. In the not-too-distant past, such a risk in the non-banking financial sector had to be navigated with a lot of sweat and toil.
In an op-ed published in this paper in August, this author had observed that the Indian savings and investment market is undergoing a structural shift. Even though the capital market may now be undergoing a correction, money is unlikely to flow back to bank deposits. Former Reserve Bank of India governor Shaktikanta Das had recognized the challenge of lower deposit growth and asked commercial banks to mobilize larger amounts. However, effective measures to deal with the issue are not on the horizon yet. Leaders of banks seem to harbour hopes of ‘the prodigal’s return.’
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India’s GDP growth rate is under pressure, inter alia, from weak credit growth. Disappointing private capital investments are one part of this story, and the regulator’s cautionary approach is a factor, but a major dampener of economic activity is low deposit growth having diminished the capacity of lenders to lend. This warrants urgent policy action by the regulator as well as bank managements.
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