Bank credit-deposit ratio: Work to restore normalcy in system continues

RBI wants banks to explain how they plan to bring it down but has set no specific target

Last week, CRISIL Ratings said that securitisation volumes rose to Rs 45,000 crore in Q1 FY24, up 17 per cent year-on-year (Y-o-Y); over 95 originators tapped this route, compared to 80 in FY23. Of this lot, the majority were non-banking financial companies (NBFCs) seeking to diversify funding sources. This follows the Reserve Bank of India (RBI) increasing risk weights on credit exposures to NBFCs.
 

But what went largely unnoticed was that banks were also more active in this market: Their transaction volumes reached Rs 8,500 crore in this period compared to Rs 10,000 crore in for the whole of FY23. Ajit Velonie, senior director at CRISIL Ratings, cites the high credit-deposit (CD) ratios (that is, credit outpacing deposit growth) to “private banks looking at alternative sources of funding with bank originations now accounting for around a fifth of the overall securitisation volumes.”
 

According to the RBI, bank credit rose by 13.88 per cent Y-o-Y to Rs 163.8 trillion as of June 28, 2024 while deposits grew by 10.64 per cent to Rs 211.95 trillion. The CD ratio stood at 79.31 per cent. It has been hovering around 80 per cent since September 2023. Mint Road made a reference to the high CD ratio to banks in January this year and while no specific number has been pegged as desirable senior bank officials said that the regulator has asked them how they plan to bring it down.

Just how long will it take for the situation to be corrected?
 

Last month, RBI Governor Shaktikanta Das said: “The persisting gap between credit and deposit growth rates warrants a rethink by the boards of banks to re-strategise their business plans. A prudent balance between assets and liabilities has to be maintained.” Bankers say off record that an increase in deposit rates will lead to higher loan pricing (settling for lower margins without doing so makes little sense); and a reduction in credit growth has larger implications for the economy.
 

The RBI’s Financial Stability Report (FSR: June 2024) notes there have been episodes of credit and deposit growth divergence persisting for two-four years; and that the average duration of these cycles is 41 months. That despite the divergence in credit and deposit growth, credit growth is sustainable within the range of 16-18 per cent beyond which it may lead to higher impairments.
 

The sharp rise in household financial savings during the pandemic (51.7 per cent of total household savings in 2020-21) has been drawn down with a shift towards physical assets. Alongside, households are also diversifying their financial savings, allocating more to non-banks and capital markets. According to Madan Sabnavis, chief economist, Bank of Baroda, “there is a difference between flow and float (of money) to banks”. Preference for investments in the bourses is a key factor and while the money does come back as deposits, its behaviour is different. He makes a case for tax breaks for small bank depositors in the Budget.
 

Now of all categories of banks, regional rural banks (RRBs) had the highest share of low-cost current and savings accounts (CASA) – 54.5 per cent of total deposits in FY23. But here too, the plot on the CD ratio is no different: For RRBs, this reached a 15-year high of 67.5 per cent in FY23, up 64.5 per cent in the preceding fiscal. There’s no granular analysis in the public domain on bank-wise deposit profiles across categories or account holders’ contribution to their share.
 

Interestingly, a paper on ‘Bank Deposits: Underlying Dynamics’ in the RBI’s May 2019 monthly bulletin says income and financial inclusion are long-term drivers while interest rate and Sensex returns impact deposit growth in the short run.

It concluded income is its most important determinant, both in the short and in the long run. That interest rate matters for deposit mobilisation but only at the margin. Financial inclusion boosts deposit mobilisation over the long run, suggesting expansion of bank branches. The substitution effects associated with Sensex returns for deposit growth are limited to the short run, warranting an appraisal of regulatory reforms and tax arbitrage. Finally, similar to Sensex returns, small savings substitute bank deposits in the short run but supplement deposits in the long run.