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Photo: Mint

Banks find it hard to lend despite an uptick in deposits

The best way to understand the prevailing lending scenario of banks is to look at their credit-deposit ratio, which has constantly been falling since March-end, following the covid-19 outbreak. As on 11 Sept, the ratio fell to a low of 71.8%. Mint takes a look.

The best way to understand the prevailing lending scenario of banks is to look at their credit-deposit ratio, which has constantly been falling since March-end, following the covid-19 outbreak. As on 11 September, the ratio fell to a low of 71.8%. Mint takes a look.

What does the credit deposit ratio tell us?

Credit-deposit ratio is obtained by dividing total loans disbursed by banks by the total deposits that the banks have on any given date. As on 27 March, the credit-deposit ratio of banks stood at 76.4%, or more than three-fourths of their deposits had been given out as loans. Banks need to maintain a proportion of their deposits as a cash-reserve ratio with the Reserve Bank of India (RBI). They also need to maintain a statutory liquidity ratio by compulsorily investing a proportion of the deposits in approved government securities. Taking these into account, the credit-deposit ratio was in healthy territory.

What has happened since 27 March?

The credit-deposit ratio has been falling since March-end following the coronavirus outbreak, and as on 11 September, (the latest data available) it stood at 71.8%. Hence, compared to March, a lower proportion of deposits were given out as loans during this period. Between 27 March and 11 September, the total amount of loans disbursed by banks shrunk by 1.4% to 102.3 trillion. This basically means that on the whole, the banks haven’t given any new loans during the period. Meanwhile, the deposits of banks during the same period expanded by 5% or 6.8 trillion to 142.5 trillion.

Free fall
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Free fall

What does the loans and deposits mismatch signify?

The shrinking of overall loans with the increase in deposits essentially explains why the credit-deposit ratio has collapsed to 71.8%. It tells us that both corporates and individuals are looking to go slow on borrowing given the brutality of the economic contraction. Prospective borrowers do not want to end up with loans they will not be able to repay.

Why have the deposits gone up dramatically?

People have been cutting down on spending and saving more for the tough times that may lie ahead, given the severe plunge in gross domestic product and economic activity. Increased savings and low borrowings have essentially led to a state where fixed deposit interest rates have collapsed. Since mid-2019, most large banks have cut interest rates by 1.6-2.2%, according to ICICI Securities. Despite the lower interest rates, fixed deposits with banks have gone up by 7.8 trillion between end-March and 11 September.

How is this trend in deposits playing out?

While fixed deposits have gone up by 7.8 trillion, demand deposits have contracted by 1 trillion. Hence, people who have lost their jobs following the pandemic or witnessed a decline in their income are withdrawing money from their savings accounts to meet their expenditure. At the same time, people who still have their jobs or continue to draw the same salary, are saving more for the rainy days.

Vivek Kaul is the author of Bad Money.

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