Indian Banks Face Slowing Credit Growth Despite Increasing Deposits, Read RBI Data

The banking sector is witnessing a shift in its financial landscape this year. The growth in bank credit is slowing down, while deposits are rising at a faster rate. Here’s a detailed look at what’s happening and why it matters.

Current Deposit and Credit Figures

As of July 26, 2024, the total bank deposits in India reached a substantial Rs 211.9 lakh crore, according to the latest data from the Reserve Bank of India (RBI). Since March 2024, banks have seen a boost in deposits, adding Rs 7.2 lakh crore. This increase is 3.5% higher than the deposits added in the same period last year.

In contrast, bank credit, which includes loans and advances, stood at Rs 168.1 lakh crore at the end of July 2024. This represents an increase of Rs 3.8 lakh crore from March 2024. However, this growth is only 2.3% more than the credit advanced during the same period last year.

Trends and Analysis

The moderation in credit growth compared to deposits highlights a broader challenge within the banking system. Analysts from CareEdge Ratings have pointed out that while personal loans and loans to micro, small, and medium enterprises (MSMEs) are contributing to the overall credit increase, the growth rate is slowing. This deceleration in credit growth is attributed to measures by the RBI, such as higher risk weights on unsecured loans and the higher base effect from previous years.

The report also notes that banks are increasingly focusing on growing their deposit base. For the financial year 2024-25, banks are expected to continue emphasizing deposit growth. They are also utilizing certificates of deposit, which come at a higher cost, to boost their funds. This strategy is aimed at ensuring that credit growth does not face constraints due to slower deposit growth.

Year-on-Year Performance

Looking at the year-on-year figures, credit growth stands at 13.6%, which is slower compared to the 19.7% growth seen last year. On the other hand, deposit growth has improved to 10.6%. Despite this improvement, deposit growth is still trailing behind credit growth from the previous year.

Credit-to-Deposit Ratio

The slowdown in credit growth has kept the credit-to-deposit ratio below 80% for the second consecutive fortnight. The recent merger of HDFC with HDFC Bank has temporarily boosted the overall credit-to-deposit ratio for the banking system. However, if we exclude the loans from HDFC, the ratio would be around 77%.

Conclusion

The current trends reflect a nuanced picture of the banking sector’s health. While deposit growth is robust, the slower pace of credit expansion indicates that banks are facing challenges in increasing their lending activities. As banks continue to focus on strengthening their deposit base, it will be crucial to monitor how these dynamics evolve in the coming months.