Credit-deposit growth mismatch statistical illusion: SBI Research

Declining deposit growth might be overstated

MUMBAI: Credit-deposit growth mismatch has been a significant concern for banks in recent years. However, SBI Research presents a different viewpoint.

According to their analysis, incremental deposit growth has surpassed incremental credit growth since FY22, with deposits increasing by Rs 61 trillion compared to Rs 59 trillion for credit.

SBI Research suggests that concerns about declining deposit growth might be overstated.

“The idea that deposit growth is flagging is largely a statistical illusion. What’s being interpreted as slowing deposit growth is actually credit growth outstripping deposits,” the report indicates.

Credit growth

As per the latest RBI data, bank credit grew by 13.7 per cent year-on-year (Y-o-Y) as of July 26, while deposits grew by 10.6 per cent Y-o-Y during the same period.

Historically, there have been periods when credit and deposit growth diverged for 2 to 4 years. Currently, we are in the 26th month of such a divergence, which might continue until between June and October 2025.

“Post this period, deposit growth may increase, and credit growth could decelerate significantly, potentially signaling a reversal in interest rates,” the report notes.

The SBI report also highlights a potential issue with the stability of savings bank deposits, which are increasingly used for transactions like UPI payments.

CASA deposits

Additionally, current account savings account (CASA) deposits are declining, falling to 41 per cent in FY24 from 43.5 per cent in FY23.

This decrease in CASA deposits contrasts with the rise in term deposits, which now constitute 59 per cent of total deposits, up from 56.5 per cent the previous year. Term deposits accounted for nearly 78 per cent of total deposit growth in FY24, as CASA funds shifted to term deposits amid rising interest rates.

The report outlines three factors contributing to the deposit growth issue: growth in reserve money, deposit leakages, and regulatory changes.

Reserve money growth

Reserve money growth slowed to 5.6 per cent Y-o-Y in March 2024, down from 7.8 per cent a year earlier, partially due to a decrease in currency in circulation (CIC).

This lower reserve money growth, below the decadal average, may contribute to slower deposit growth, as it affects the money supply through the money multiplier effect.

SBI Research also notes that banks secured Rs24.3 trillion in deposits in FY24, with 55 per cent from households (~Rs 14.1 trillion). However, deposit leakages, including tax-related withdrawals, might be around Rs7.5 trillion.

Additionally, tighter RBI regulations over the past two years have decreased the systemic liquidity coverage ratio (LCR) to 130 per cent in March 2024 from 147 per cent in March 2022, reflecting tighter liquidity management by banks.