How faster deposit growth could become counterproductive for banks

Should deposit growth continue to outpace credit growth, banks may end up ceding some hard-earned 25-50 bps improvement in profitability or net interest margin gained in the past two years

Bank deposits have been growing in single digits of late. But ever since the economy opened up after the lockdown, there has been a peculiar trend, thanks to extreme risk aversion in the banking system. 

Deposit growth has started outpacing bank credit. The recent data for September indicates that bank credit grew 5.3 per cent, while deposit growth rate more than doubled to 12 per cent year-on-year. 

Should this trend persist, banks may be looking at ceding some hard-earned 25-50-basis points (bps) improvement in profitability or net interest margin (NIM) gained in the past two years. Simply put, faster deposit