Deposit Growth Matches Credit Amid Lending Slowdown

In the fortnight ending November 1, 2024, deposit growth nearly matched credit growth, with credit increasing by 11.9% and deposits growing by 11.83% year-on-year (Y-o-Y), according to data released by the Reserve Bank of India (RBI). This alignment comes after a period where credit growth consistently outpaced deposit growth since March 2022, driven by a significant widening gap that reached as high as 700 basis points. The shift reflects the impact of RBI’s regulatory measures and the moderation of credit growth, especially in sectors like unsecured loans and non-banking financial companies (NBFCs).

Key Factors Behind the Shift

Credit Growth Slows Down: Following RBI’s increased risk weights on unsecured loans and loans to NBFCs, as well as directives to lower loan-to-deposit ratios (LDRs), credit growth has slowed, bringing it more in line with deposit growth.

HDFC’s Impact: HDFC Bank, India’s largest private sector lender, has also moderated its credit growth to reduce its high LDR, contributing further to the slowdown.

Experts’ Outlook on Credit and Deposit Growth

Moderated Credit Growth: Experts suggest that while the growth rate of credit has slowed, it may accelerate in the fourth quarter of FY25. The forecast for credit growth in FY25 is around 15%, with deposits likely to grow by 11-12%, led by private sector banks.

Deposit Growth Outlook: The steady deposit growth reflects banks’ efforts to bolster their liability side, especially after regulatory nudges from the RBI. However, state-owned banks may need to intensify deposit mobilization to manage rising LDRs.

Future Trends and Predictions

Anticipated Growth in Q4: As the year progresses, the general expectation is that credit growth will surpass deposit growth, particularly with a seasonal uptick in credit demand during the final quarter of the fiscal year.

Banking Strategies: Banks, particularly private sector ones, are expected to continue leading in deposit mobilization, while public sector banks may need to catch up due to lower LDRs.

Credit Amid Lending Slowdown

Credit growth has decelerated, aligning closely with deposit growth as of November 1, 2024. This slowdown is due to the Reserve Bank of India’s measures, including higher risk weights on unsecured loans and restrictions on lending to NBFCs. Major banks like HDFC have also pulled back on lending to lower their loan-to-deposit ratios. Despite this, experts expect credit growth to pick up in the last quarter of FY25, supported by seasonal credit demand.

Summery of the News

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