High loan-deposit ratio not a concern, deposit growth not weak: Report

The high loan–deposit (LD) ratio of the Indian banking system at 77.2 per cent as of August 9 is not a matter of concern currently since there is no tightness in the banking sector as exhibited by an average Liquidity Adjustment Facility (LAF) deficit of 0.3 per cent of net demand and time liabilities and a stable weighted average of call rate (WACR), said Motilal Oswal Financial Services in a research note on Wednesday.

At 77.2 per cent, the LD ratio was higher than 77 per cent for the tenth straight month.

The research note has also contradicted the recent narrative that deposit growth in the banking system has been sluggish.

 

According to the note, deposits grew at an average of 9.5 per cent during the pre-Covid period (January 2015 – February 2020), while it has grown by 10.4 per cent during the post-Covid period (March 2020 – August 2024), implying an average growth of 9.9 per cent during the past decade (January 2015 – August 2024).

Latest Reserve Bank of India (RBI) data shows bank deposits increased 10.8 per cent Year-on-Year (YoY) as of August 9, 2024, which is better than the medium to long-term average growth.

“We are actually quite perplexed regarding this entire debate about the high LD ratio. Typically, an increasing LD ratio is associated with heightened tightness in the banking sector, which may suggest potential overheating. This time, it is not the case,” research analysts Nikhil Gupta and Tanisha Ladha wrote in the note.

The LD ratio had peaked in September 2013 at 78.8 per cent, and the recent peak was 78.2 per cent in March 2024. In the past 15 years, there have been three episodes, including the recent episode, where LD ratios have risen to 77-78 per cent levels, the research note stated.

Last month, SBI Research, in a similar report, highlighted that the myth of a flagging deposit growth appears as just a statistical myth with credit growth outpacing deposit growth being tom-tommed as a deceleration in deposit growth. It also pointed out that incremental deposit growth at Rs 61 trillion has exceeded incremental credit growth of Rs 59 trillion since FY22.

Both the Reserve Bank of India (RBI) and the finance ministry have expressed concerns on numerous occasions over the sluggish pace of deposit growth as compared to credit growth, which is creating a divergence that may lead to asset liability management problems for banks. Additionally, they have instructed banks to employ innovative methods to accrue more deposits.

“…our analysis suggests that deposit growth could be raised by either making other asset classes unattractive (through taxation and/or interest rate) or increasing growth in net credit to the government by pushing fiscal spending higher,” the research note suggested. Since January 2024, net credit to the government by the RBI and the banking sector has grown at low single-digits, acting as a drag on deposit growth, it added.

Alternatively, if they look at curtailing credit growth, either unsecured personal loans could witness further restrictions or business loan growth could be targeted, the research note has suggested.

“Policymakers can also attempt to encourage savers to shift their investments from other asset classes to bank deposits. However, this may require significant effort from regulators and carries the risk of overreach. Further, such measures could undermine general confidence, potentially hindering economic growth. Overall, nearly all policies aimed at reducing the LD ratio could ultimately harm domestic economic growth,” the research report noted.