Incremental deposit growth outpaced credit growth since FY22: SBI Research

Myth of flagging deposit growth appears as just a statistical myth with credit growth outpacing deposit growth being tom-tommed as a deceleration in deposit growth, the research report said

Amid concerns from the Reserve Bank of India (RBI) about the slower pace of deposit growth than that of loans, a report by SBI Research on Monday said that incremental deposit growth at Rs 61 trillion has exceeded incremental credit growth of Rs 59 trillion since FY22.

“Thus, the myth of a flagging deposit growth appears as just a statistical myth with credit growth outpacing deposit growth being tom-tommed as a deceleration in deposit growth…,” the research report noted.

According to the latest RBI data, as of July 26, bank credit grew at 13.7 per cent while deposits grew at 10.6 per cent year-on-year (Y-o-Y) during the same period.

The SBI report highlighted that historically there have been episodes of credit and deposit growth divergence persisting for two-four years. “We are in the 26th month of credit and deposit divergence. Hence, the end of the divergence cycle could be June-October 2025,” it said.

“Beyond such time, deposit growth could inch up and credit growth should decelerate significantly, which signals a rate reversal cycle… growth slowdown to some extent looks on the cards,” the report stated.

The report has also cautioned that the stability of savings bank deposits could be an issue since these accounts are now being used as a purely transaction motive and mostly for UPI transactions. Additionally, the banking system is currently witnessing a decline in current account savings account (CASA) deposits because of the slide in savings bank deposits. CASA deposits were down to 41 per cent in FY24 from 43.5 per cent in FY23.

While CASA deposits are declining, term deposits have been driving the compositional shift in bank deposits: the share of term deposits in total deposits has risen to 59 per cent in FY24 from 56.5 per cent in FY23. “On an incremental basis, term deposits accounted for nearly 78 per cent of the total deposits in FY24 though the shares of CASA deposits have declined from their 2023 levels. This is obvious as in an increasing interest rate scenario, CASA moves to time deposits,” the report said.

According to the report, the deposit growth problem has to be viewed from three perspectives — growth in reserve money (RM), leakages, and regulatory dispensation.

The growth of reserve money has declined to 5.6 per cent Y-o-Y in March 2024 as against 7.8 per cent a year ago, which could be due the slide in currency in circulation (CIC) to 3.9 per cent in FY24, compared to 7.8 per cent in FY23. “The yearly growth of RM in the last two fiscals is less than the decadal average growth. This may be one of the reasons for the low deposits growth as base money is not increasing. Further, growth in RM creates supply of money in the economy through money multiplier,” the report said.

Additionally, the report highlighted that banks have garnered deposits worth Rs 24.3 trillion in FY24, of which 55 per cent came from households (Rs 14.1 trillion). However, there are leakages from deposits in various forms, as also deposits being appropriated, rendering them unavailable for discretionary commercial lending by banks. “Basis our calculations, the leakages from the system could be around Rs 7.5 trillion under base case scenario, out of which Rs 2.1 trillion could be due to tax on interest income on deposits (Rs 76,000 crore) and self-assessment tax (Rs 1.29 trillion),” the report stated.

Further, the report highlighted that in the last two years, RBI has tightened many guidelines to ensure banks maintain sufficient liquidity to handle sudden cash outflows. So, the systemic liquidity coverage ratio (LCR) has declined by Rs 17 per cent to 130 per cent in March 2024 from 147 per cent in March 2022.

“The new LCR guidelines on digital banking channels, which may become effective from April 1, 2025, may lead to a short-term impact on credit growth,” the report added.