Bank credit growth outpaces deposits again, albeit at a sluggish pace

Latest Reserve Bank of India (RBI) data showed the growth in deposits and credit was lower than the year-ago period, reflecting a slowdown in economic activities due to the uncertainty on the economic outlook because of the Lok Sabha elections.

Year-on-year credit and deposit growth rates in the same period of 2023-24 were higher – at 16.3% and 12.9%, respectively

Nonetheless, deposit growth continues to lag credit growth, and this trend has emerged as a major area of regulatory concern. RBI Governor Shaktikanta Das highlighted the need to address the persisting gap between credit and deposit growth at a meeting with public sector and private bank CEOs earlier this month.

In his June bi-monthly monetary policy statement, Governor Das said the persisting gap warrants a rethink by the boards of banks to re-strategise their business plans. A prudent balance between assets and liabilities must be maintained.The trend has implications for transmission of monetary policy as well.”The transmission of the repo rate increases undertaken in 2022-23 to banks’ lending and deposit rates continued in 2023- 24 amid moderation in surplus liquidity in the banking system and credit growth persistently outpacing deposit growth,” the Governor said in his June statement.Monetary Policy Committee member Ashima Goyal, who has made a case for rate cuts, had said that even if there was some initial reduction after a repo cut, rising loan demand and slower deposit growth would tend to raise both loan and deposit rates.