Credit-deposit ratios of banks spark debate: Is there a cause for worry?

The slowing growth in bank deposits, compared to credit, in recent times has raised concerns with both the government and the regulator — the Reserve Bank of India (RBI) — flagging the issue. However, many believe that it is not a systemic concern but may be specific to individual banks since every credit creates its own deposit.  

The annual growth in bank credit, at 13.7 per cent, outpaced the 10.6 per cent increase in deposits as of July 26, according to RBI data. The credit-deposit ratio for all scheduled commercial banks (SCBs) increased from 78.3 per cent in 2018-19 to 79.6 per cent in 2023-24.

The credit-deposit ratio refers to how much bank deposits are being lent as loans. A higher ratio indicates potential liquidity challenges and credit risks for banks.

“A higher credit-deposit ratio might indicate that a bank is using its reserves for lending,” says Madan Sabnavis, Chief Economist at Bank of Baroda. The risk can increase when banks borrow from the market for shorter tenures at a higher cost to fund long-term lending, as it creates asset-liability management issues, he adds.  

Former financial services secretary D K Mittal says it would be a concern if slow deposit growth were to constrain bank lending. “However, at present banks continue to lend without any issues,” he says, adding that though deposit mobilisation is important, directly comparing it to credit growth is not entirely fair. “Banks have ways to raise funds beyond deposits, like non-convertible debentures and certificates of deposit, which they use on a need basis,” he points out.

Structural liquidity

Though increased lending generally leads to more deposits through the credit multiplier effect, reduced liquidity has led to shrinking deposit pools, points out Saugata Bhattacharya, senior fellow at the Centre for Policy Research.

“Structural liquidity in the financial system has decreased due to RBI tightening, leading to a reduction in the total funds available to be mobilised as deposits,” says Bhattacharya. Structural liquidity among banks refers to the availability of funds that are stable enough to sustain long-term lending.

The credit-deposit ratio in the private sector banks reached 94.1 per cent compared to 72.4 per cent in the public sector banks in 2023-24.

Bhattacharya says public sector banks tend to have a lower credit-deposit ratio compared to private sector banks because they have a larger branch network, which allows them to attract a bigger pool of deposits. “Additionally, they (public sector banks) have access to larger central and state governments' businesses and hence balances (than private sector banks),” he says.  

The ratio for regional rural banks (RRBs) was slightly higher than that of public sector banks. Urban cooperative banks have the lowest credit-deposit ratio among these categories.

Casa share

The share of deposits in current and savings accounts (Casa) in total deposits of scheduled commercial banks (SCBs) was 41 per cent in 2023-24 against 43.6 per cent in the year before and a four-year high of 45.2 per cent in 2021-22. Casa is low-cost deposits and therefore their large share in total deposits reduces the cost of deposits.

“There has been a shift in individual preferences from traditional bank deposits to more market-oriented investments, altering the composition of deposits. Previously, a larger part of savings would go into the savings bank accounts, but this trend has declined,” explains Bhattacharya.

The Casa-to-total-deposit ratio in the first quarter of 2024-25 had dropped, with more funds shifting into higher-cost fixed deposits. As a result, the cost (interest rates) of deposits has gone up, he adds. He suggests banks may need to raise interest rates to attract deposits.

"Within regulatory boundaries and reasonable risk, linking part of deposits to equity and bond markets to bump returns might be an experiment," Bhattacharya suggests.

To boost deposits, banks typically raise interest rates. They are selectively increasing rates for certain maturities, anticipating that interest rates will eventually decrease, which means locking in deposits at a higher cost might not be ideal, explains Sabnavis.

The gap between credit and deposit growth for the banking system has persisted for some time now. This has led to an increase in the certificate of deposit borrowings by banks, says Sakshi Gupta, principal economist at HDFC Bank. Certificates of deposit are a short-term borrowing instrument issued by banks to raise funds from the market, helping them manage their immediate liquidity needs.

“However, recent data indicates that this gap is perhaps beginning to reduce due to a slowdown on the credit side, in part driven by regulatory measures from the RBI, for example, for unsecured loans,” she explains. In November 2023, the central bank raised the risk weighting on specific categories of unsecured loans by 25 basis points to curb the growth in lending within this segment.

In 2023-24, Casa made up 40.5 per cent of total deposits in public sector banks and 40.7 per cent in private sector banks, both lower than the previous year's figures. However, for RRBs, the ratio was higher at 55.8 per cent and has remained around that level since 2018-19.

Household front

Bhattacharya suggests that measures to increase household financial savings could also contribute to higher deposits in banks.

Data shows the share of net household savings as a percentage of the gross domestic product (GDP) was at a 47-year low of 5.1 per cent in 2022-23.

Sabnavis says the high inflation and steady consumption are leading to lower savings, resulting in minimal growth in financial savings. "This is a common conundrum for countries aiming to encourage higher consumption,” he points out.  

Last month, Finance Minister Nirmala Sitharaman had urged banks to find innovative solutions to bridge the gap between credit and deposit growth as the latter is increasing at a slower rate.  

RBI Governor Shaktikanta Das, in the August 2024 monetary policy statement, highlighted that banks were facing structural liquidity challenges due to “bank deposits trailing loan growth”. He asked banks to focus on “mobilisation of household financial savings through innovative products and service offerings and by leveraging fully on their vast branch network”.