Are banks still seeing a seasonality factor in deposits and credit?

The popular view is that the second half of the year sees a bump in credit on account of the festive and wedding seasons. We examine if the data backs up this perception

Is the second half of the year still the busy season? In the festive season and the post-harvest months, demand for goods tends to increase. The same is replicated for banking where it is believed that demand for credit increases in the second half. Until a couple of decades ago, even the Reserve Bank of India had two credit policies – for the slack and busy seasons. This is passe now given that economic activity is spread throughout the year. But are there sharp distinctions in the way in which deposits and credit  behave in the first half of the year versus the second? 

A new report from the Bank of Baroda’s economics research department shows that in the case of deposits, a shade less than 50 per cent is mobilised in the first half of the year; this proportion has been variable over the years. For credit, it is lower and has witnessed a declining trend up to the Covid-19 pandemic. This supports the view that production and, hence, demand for credit is sharper in the second half relative to the first six months. 

During the pandemic, deposits saw a decline to 38.1 per cent as this was also the period when there was significant migration to the mutual funds segment as the stock market did well and households diverted their savings to these instruments. Credit, too, fell in the two years which had led to a negative number. But post-Covid-driven lockdowns, however, there was a sudden spike showing a return to normalcy. 

While the shares of the two halves are in alignment with the five-year average, broadly speaking, there is considerable variation on an annual basis as given by the standard deviation for the first half of the year (See table). 

It may be concluded that credit growth does pick up in the second half of the year and the share would tend to be in the region of around 60-65 per cent based on annual data. Deposits on the other hand would be more evenly spread out in the two halves of the year. Thus, from the point of view of liquidity management, the second half would always tend to be testing for banks and the central bank due to the acceleration in credit accretion relative to the first half of the year. Therefore, the slack-busy season theory is still relevant from the point of view of credit.