Banks need to align credit and deposit growth: RBI

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Ziraat Times
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New Delhi, Aug 19: Pressure on net interest margin (NIM) may soon force commercial banks to align loan growth more closely with deposit growth, stated the Reserve Bank of India’s (RBI) latest State of the Economy Bulletin.

The report highlighted the imbalance between the two financial metrics, as deposit growth has consistently outpaced loan growth for over a year. This trend has led regulators to push banks to bolster their resource mobilisation efforts.

According to the latest data, as of July 26, year-on-year bank credit growth stood at 13.7 per cent, while deposit growth lagged at 10.6 per cent.

“In the quarter-ended June 2024, banks have been impelled to increase mobilisation of funds through certificates of deposit and through high value saving accounts and fixed deposits,” stated the report authored by RBI staffers.  “Going forward, the low share of low-cost current and saving deposits in total deposits may curb domestic fundraising efforts of banks through high-cost funding options, due to a likely squeeze on banks’ net margins.”

“This may also force banks to align loan growth more closely with deposit growth and normalise incremental credit-deposit ratios,” it said. “In part, this behavioural shift may be induced by signs of stress in the unsecured loan segments, especially in personal loans and credit cards portfolios.”

The bulletin pointed to a significant increase in certificate of deposit (CD) issuances by banks, which reached ~3.49 trillion during 2024-25 (until August 9), compared to ~1.89 trillion in the same period last year. This surge in CD issuance is attributed to the slower growth in deposits compared to credit, pushing banks to seek alternative funding sources.

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