Home / Industry / Banking /  Bank deposit and credit remain on divergent paths

MUMBAI : Bank deposits in the June quarter grew at the fastest pace in close to three years even as credit growth continued to decelerate, data from the Reserve Bank of India (RBI) showed.

While deposits grew 11.5% from a year ago, credit grew at 6.4%, the slowest since the March quarter of 2017.

Bank deposits have grown despite lenders lowering interest rates on term deposits and savings bank accounts. Industry experts believe that customers are likely stocking up capital, owing to the uncertainty that the pandemic has brought.

Although this is the latest quarterly data available on credit and deposits, RBI also publishes fortnightly data on these parameters. For instance, bank credit growth stood at 5.52% y-o-y and deposits increased 11.04% in the fortnight ended 14 August.

Experts believe that deposit growth outpacing credit growth has flooded the banking system with liquidity. After declining to 6 trillion, money parked with the central bank under the reverse repo window rose further to reach 7.28 trillion as on 3 September. Banks have been parking their excess liquidity with RBI at a meagre interest rate of 3.35% amid dwindling demand for new loans.

“The deposits growth (as of 14 August) has increased faster at 11% compared to the last two years, where the deposits registered growth between 8-10%. This indicates that the depositors are spending less and instead stocking up funds in bank deposits," Care Ratings said in a note on 29 August.

Care Ratings said liquidity is expected to be in surplus, aided by sustained growth in bank deposits as against slower growth in credit off-take.

According to the central bank’s financial stability report in July, deposit growth witnessed a pick-up in the early months of 2020-21, reflecting covid-19 related precautionary savings behaviour. Aggregate deposits of the banking system grew 5.09 trillion between 27 March and 14 August, while bank credit shrank by 1.52 trillion in the same period, showed RBI data.

Analysts at Anand Rathi Research pointed out that the year-to-date rise in deposits by over 5 trillion is the highest ever in the corresponding periods of any other year in the past.

“Given the marked income, revenue and job losses, the rise in deposit growth seems to be driven by lower transaction demand and precautionary cash preservation in the face of the huge uncertainties created by the pandemic, continued lockdown restrictions and the slide of the business cycle," the Anand Rathi note said on 28 August.

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