On Monday, Finance Minister Nirmala Sitharaman conducted a review meeting with the heads of Public Sector Banks (PSBs) and Regional Rural Banks (RRBs). This meeting took place against the backdrop of a recent report by the State Bank of India (SBI), which challenges the prevalent belief that deposit growth in the banking sector is faltering. According to SBI, this perception is a statistical myth.
Credit vs. Deposit Growth: A Deeper Analysis
The SBI report acknowledges that credit growth has indeed outpaced deposit growth in recent years. This has led some to interpret the situation as a sign of decelerating deposit activity. However, a closer examination reveals a different narrative.
In the fiscal year 2023 (FY23), the banking sector, particularly All Scheduled Commercial Banks (ASCBs), experienced the highest absolute growth in both deposits and credit since 1951-52. Deposits surged by an impressive ₹15.7 lakh crore, while credit expanded by ₹17.8 lakh crore. This rapid expansion pushed the incremental Credit-Deposit (CD) Ratio to a remarkable 113%. The momentum carried over into FY24, with deposits rising by ₹24.3 lakh crore and credit by ₹27.5 lakh crore.
The Myth of Declining Deposit Growth
Contrary to the narrative of slowing deposit growth, the data suggests otherwise. Since FY22, incremental deposit growth has actually outpaced incremental credit growth, with deposits increasing by ₹61 trillion compared to ₹59 trillion in credit. The SBI report states that “Decadal Deposits have expanded by a sharp 2.75 times, but Decadal credit expanded by 2.8 times since FY22, deposits expanded ₹61 trillion vis-a-vis credit expansion at ₹59 trillion.”
The report emphasizes that the real issue lies not in the quantity of deposits but in their pricing. Historical trends indicate that periods where credit and deposit growth diverge can last between 2 to 4 years. As of June 2024, according to a Reserve Bank of India (RBI) study, the banking sector is in the 26th month of this divergence. Predictions suggest that this cycle may conclude between June and October 2025.
The End of the Divergence Cycle
The SBI report predicts that once the current divergence between credit and deposit growth ends, deposit growth is expected to pick up, while credit growth could slow significantly. This shift may signal the beginning of a rate reversal cycle and a potential economic slowdown.
Decline in CASA Deposits
Another significant trend in the banking system is the decline in Current Account Savings Account (CASA) deposits. The SBI report notes that CASA deposits fell to 41.0% in FY24 from 43.5% in FY23, largely due to a decline in Savings Bank (SB) deposits. Although this decline aligns with pre-pandemic levels of 42%, it reflects a shift in the use of SB deposits. Increasingly, SB deposits are being used primarily for transactional purposes, particularly through UPI transactions, which raises concerns about the stability of these deposits.
Shift Towards Term Deposits
The rising returns on term deposits have also driven a significant compositional shift in bank deposits. The share of term deposits in total deposits increased to 59.0% in FY24 from 56.5% in FY23, while the share of CASA deposits continued to decline. The report indicates that this shift is a natural response to the higher interest rate environment, as funds move from low-interest CASA accounts to higher-yielding time deposits. On an incremental basis, term deposits accounted for nearly 78% of the total deposits in FY24, underscoring the impact of higher interest rates on deposit behavior.
Conclusion
In conclusion, while the myth of declining deposit growth persists, the reality is more complex. Deposit growth remains robust, with term deposits taking an increasingly larger share as interest rates rise. This trend indicates a strategic response by depositors to the evolving economic environment.
