RBI asks banks to rework biz plan, flags gap in credit, deposit rates

Warns microfinance institutions, NBFCs against 'usurious' rates on small loans

Reserve Bank of India (RBI) governor Shaktikanta Das on Friday asked banks to rework their business plan in light of persisting gap between credit and deposit growth rates, and consequent challenge to manage liquidity, re-pricing and rollover risks.

“The persisting gap between credit and deposit growth rates warrants a rethink by the boards of banks to re-strategise their business plans. A prudent balance between assets and liabilities has to be maintained,” Das said in a statement.

The governor also warned non-banking finance companies (NBFCs) and microfinance firms that are charging very high rates on small-ticket loans, and said that the regulator will monitor growth in unsecured loans book and its risks.

RBI data for the fortnight ended May 17, 2024 puts the gap between credit and deposit growth rates at 3.1 percentage point (310 bps). Despite banks being active in mobilising deposits, for more than a year now, the gap between credit and deposit growth has ranged between 3.0 and 3.5 percentage points. The above excludes the impact of HDFC’s merger with HDFC Bank. The gap widens to 6.2 percentage point (620 bps) if the merger effects are factored in.

After April 2024, this is the second time the RBI has flagged concerns over the gap in deposit and credit growth rates.

The credit-deposit ratio (C/D ratio) of banks has been running close to 80% since September 2023. Banks are facing pressure on resources for funding credit demand taking into account the regulatory requirements of maintaining Cash Reserve Ratio (CRR) of 4.5% and Statutory Liquidity Ratio (SLR) of 18%. 

Saurabh Bhalerao, Associate Director, BFSI Research, CareEdge, said the C/D ratio is likely to remain elevated at above 81% in FY25.

In the post-policy media interaction, Swaminathan J, deputy governor of the RBI, said: “We don’t have an ideal C/D ratio, which can be prescribed across the system. Because it purely depends on the business model, type of bank and their own risk appetite framework.”

“In case this gap widens further, there could be a liquidity risk, or rollover risk, or re-pricing risk. That is the reason we would like to flag it to their attention,” he added.

Referring to rates charged by some microfinance firms and NBFCs, the governor said interest rates on small-value loans are high and appear to be usurious.

The regulatory freedom enjoyed by the regulated entities in respect of interest rates and charges should be used judiciously to ensure fair and transparent pricing of products and services, the governor said. The RBI continues constructive engagements with such financial entities to safeguard the interest of customers and ensure overall financial stability, he added.

The entities will have to disclose different interest rates being charged, Das said in an interaction with the media. RBI has noticed usurious cases and it was engaged with the entities, asking them to justify how they are charging such high interest rates, he added.

Das said in Nov 2023, the RBI had flagged certain concerns on excessive growth in unsecured retail loans and over-reliance of finance firms on bank funding. Recent data suggests that there is some moderation in these loans and advances.

In Nov 2023, the RBI had increased risk weights on unsecured consumer credit and bank credit to NBFCs to pre-empt build-up of any potential risk in these segments.

Consequently, credit growth in unsecured personal loans such as “credit card outstanding” declined from 34.2% in Nov 2023 to 23% in April 2024, while growth in bank credit to NBFCs declined from 18.5% in Nov 2023 to 14.4% in April 2024, the RBI said.