Mind the Gap: India’s Credit Growth versus Deposit Disparity

India’s credit growth has been on a strong upward trajectory. Data in RBI’s weekly statistical supplement showed bank credit increase to Rs.166 lakh crore on April 5, 2024, a 20% from the end of the previous financial year. All signs indicate that this trend is here to stay.

Despite global economic uncertainties, India’s low domestic credit to GDP ratio¹ compared to other countries shows that there is plenty of room for growth. This expansion can be driven by significant activity on the credit front, led by both traditional banks and fintech companies, under close watch by regulators.

Notably, non-food credit² has seen a CAGR of 14% for the past five years. Although, this is good news, it also means that the lenders will now have to find cheap sources of money to keep up this growth.

Figure 1: India’s credit consumption picture

Deposits and CASA Balances: The Foundation of Bank Capital

Deposits, particularly Current Account and Savings Account (CASA) balances, have historically been the most affordable sources of capital for the banks. Credit growth, however, has significantly outpaced deposit increase in India. While non-food credit grew at a 14% CAGR, total deposits increased only by 8% CAGR in the same period. This gap underscores a critical challenge for the banking sector: getting sufficient cheap capital to support the growing demand for credit.

Figure 2: Banks & CASA ratio

Figure 3: CASA ratio for individual banks

Deciphering Indian Household Financial Habits

Private credit⁴ as a percentage of GDP has improved significantly. This shows that Indians have embraced borrowing and are now more leveraged than ever. This trend reflects an increased willingness to take on debt and a robust appetite for credit. However, while borrowing is on a rise, overall household savings have remained stagnant. Analysis of household savings shows that financial assets as a percentage of GDP have consistently hovered around the 11%, excluding the unusual times of COVID-19. Deposits have held steady at about 4% of GDP in the recent years, indicating lack of growth in traditional savings channels.

Figure 4: Savings slim, borrowing bold!

The Profit Puzzle for banks

While credit growth theoretically boosts banks’ income via more interest earnings, the slowdown in deposits is undermining this potential profitability. Deposits are a cheaper source of capital compared to borrowing from the open market. Within deposits, CASA deposits are especially valuable because they have lower interest obligations (Refer to figure 2 & 3 above).

A closer look at leading banks reveals a troubling trend: the proportion of CASA deposits is declining, in turn raising the overall cost of funds for the banks.

The higher credit-deposit ratio⁵ is prompting banks to aggressively seek strategies to beef up their deposit bases. A concerted effort to attract more deposits is underway, tapping into both traditional and innovative approaches.

Fintechs are poised to play a pivotal role here as they assist large financial institutions in this endeavor. By integrating fintech innovations, banks can potentially enhance their deposit-gathering efforts, improve customer engagement, and optimize their liability management.

Here are a few key areas for fintechs to focus on:

1. Retail Liabilities

• Domestic sources: These include individual CASA, FDs, and other retail deposit products. The key themes here are infrastructure for wealth managers, asisted wealth products for mid-market and tools for distribution.
• International sources: Attracting deposits from the Indian diaspora and foreign investors can provide an additional stream of funds for the banks. Fintechs can look at solving for taxation & compliance for NRI investors or build digital journeys for multi asset access.

2. Commercial Liabilities

• These consist of deposits and borrowings from small and medium enterprises (SMEs) and other commercial entities. Here, fintechs can look at vertical models in B2B payments, education, healthcare, retail that will help the banks in getting more people to park their money with them.

In conclusion, we would just say that the Indian banking sector is at a juncture where balancing credit growth with sustainable deposit mobilization is essential. They need to address the challenges of deposit growth and CASA decline through strategic initiatives and fintech collaboration. And as banks navigate this landscape, a diversified approach to liability management will be key to maintaining financial stability and fostering continued economic growth.

Appendix

1. Domestic credit to GDP ratio: It is a measure of the total amount of credit provided to the economy by financial institutions, relative to the country’s GDP. A low domestic credit to GDP ratio means that a smaller portion of the country’s economic activity is financed through credit.
2. Non-food credit: Non-food credit refers to the loans extended by banks for purposes other than agriculture and allied activities, which are categorized as “food credit.” It includes loans provided to various sectors like manufacturing, services, trade, etc.
3. CASA Ratio: It is a financial metric used by banks to measure the proportion of their total deposits that come from CASA. These accounts typically have lower interest rates compared to Fixed Deposits and other deposit types.
4. Private Credit: It refers to credit extended to individuals and non-governmental entities by financial institutions such as banks, NBFCs and other lenders.
5. Credit-Deposit ratio: It is a financial metric that measures the ratio of credit extended by banks versus the deposits they hold.