Banks need to align credit and deposit growth, says RBI Bulletin

Pressure on NIM cited, upside risk to headline inflation flagged

Pressure on net interest margin (NIM) may soon force commercial banks to align loan growth more closely with deposit growth, stated the Reserve Bank of India’s (RBI) latest State of the Economy Bulletin.

The report highlighted the imbalance between the two financial metrics, as deposit growth has consistently outpaced loan growth for over a year. This trend has led regulators to push banks to bolster their resource mobilisation efforts.

According to the latest data, as of July 26, year-on-year bank credit growth stood at 13.7 per cent, while deposit growth lagged at 10.6 per cent.

“In the quarter-ended June 2024, banks have been impelled to increase mobilisation of funds through certificates of deposit and through high value saving accounts and fixed deposits,” stated the report authored by RBI staffers.  “Going forward, the low share of low-cost current and saving deposits in total deposits may curb domestic fundraising efforts of banks through high-cost funding options, due to a likely squeeze on banks’ net margins.”

The views expressed in the report are that of the authors and not of the RBI itself.

“This may also force banks to align loan growth more closely with deposit growth and normalise incremental credit-deposit ratios,” it said. “In part, this behavioural shift may be induced by signs of stress in the unsecured loan segments, especially in personal loans and credit cards portfolios.”

The bulletin pointed to a significant increase in certificate of deposit (CD) issuances by banks, which reached ~3.49 trillion during 2024-25 (until August 9), compared to ~1.89 trillion in the same period last year. This surge in CD issuance is attributed to the slower growth in deposits compared to credit, pushing banks to seek alternative funding sources.

Turning to the headline inflation, the report highlighted a decline below the 4 per cent target set by monetary policy, but noted that this was driven by statistical base effects.

“…inflation moderated from its spike in June to below the target of 4 per cent in July, but this was primarily due to the downward statistical pull of large base effects that concealed the strong price build-up in the food category,” it said.

It pointed out that price momentum in the food category in the Consumer Price Index (CPI) in July was well above long-term averages. “This has also propelled CPI headline momentum above trend,” it said.

The report raised concerns about an unabated vegetable price shock, coupled with pulses registering double-digit inflation and cereals inflation remaining elevated. Core inflation, which had shown signs of softening between June 2023 and May 2024, ticked upwards again. These developments, the report warned, “impart an upside (risk) to the overall inflation outlook.”

On a more positive note, the bulletin indicated that aggregate demand conditions were gathering momentum, after a slowdown in the April-June period. Rural consumption, buoyed by rising incomes, is beginning to fuel growth in the fast-moving consumer goods (FMCG) sector.

Reflecting these forces of turnaround, FMCG companies are starting to see green shoots of revival, it said.

“These factors which act as stimuli to demand are expected to reinvigorate the hitherto subdued participation of the private sector in total investment, a key accelerator of overall growth of the economy in view of higher levels of productivity and innovation,” the report said, adding there are early indications of new capacity creation in a few industries and a pick-up in investment intentions.