Geopolitical risks may keep credit-deposit gap elevated: SBI report

SBI Economic Research says prolonged geopolitical tensions and supply shocks could keep credit growth ahead of deposits, though FCNR(B) inflows may improve deposit mobilisation

If geopolitical risks and external supply shocks persist, the gap between credit and deposit growth—which currently stands at over 530 basis points (bps)—is likely to remain elevated, although deposit growth is expected to improve with the inflow of FCNR(B) deposits, potentially altering the dynamics, according to an SBI Economic Research report released on Monday.

 

The report highlights that supply-side shocks are transmitted asymmetrically across banking aggregates, with bank credit growth responding more strongly than bank deposit growth.

 

"Crude oil shocks are the dominant source of such variation in credit, while food inflation becomes increasingly important for deposits over long horizons. Furthermore, the shocks of food inflation on deposits accumulate over longer horizons rather than dissipating," the SBI report said.

 

It highlights that in FY05, when the average oil price was $41.3 per barrel, over 40 per cent higher than $29 per barrel in the previous year, credit growth was 21.7 per cent while deposit growth was 14.1 per cent.

 

The report also highlights that banks need to adopt a different liquidity management strategy during periods of geopolitical tensions and external supply shocks, as these can keep the gap between credit and deposit growth elevated. It said food inflation plays a significant role in deposit mobilisation, although the impact of food price pressures caused by deficient rainfall has so far remained contained. The report also stressed that long-term energy decoupling is crucial for sustaining stable economic growth and capital formation.

 

According to RBI data, credit growth in the banking system at the end of June stood at 18.6 per cent year-on-year (Y-o-Y), while deposits grew 13.3 per cent Y-o-Y during the period.

 

According to the SBI report, an analysis of bank deposits as a proxy for demand-side trends points to three major structural shifts since the Covid-19 pandemic. First, traditional deposit markets in large metropolitan centres have begun to saturate, with deposit growth increasingly shifting towards semi-urban and rural areas. The report attributed this trend to rising women's empowerment and the proliferation of women-centric government schemes.

 

Second, there has been a marked preference for term deposits across broad institutional categories, including non-financial and financial corporations, alongside a change in household savings behaviour. Census towns are emerging as new hubs for institutional deposits, while banks are also increasingly mobilising current account and savings account (CASA) deposits from institutional sources.

 

Third, the growing preference for term deposits has altered the contractual maturity profile of deposits, with the share of the one-to-three-year maturity bucket increasing as banks seek to better align assets and liabilities under the external benchmark lending rate (EBLR) regime. The report added that ongoing FCNR(B) deposit mobilisation could lead to a further shift towards the five-year maturity bucket, as most inflows so far have been been concentrated in that tenor.