Bank deposit and credit remain on divergent paths

While deposits witnessed a 11.5% year-on-year (y-o-y) growth in June 2020, bank credit grew at 6.4% in the same period. Credit growth, which has been declining for a few months now, was at its lowest since the March quarter of 2017.

The growth in bank deposits has come despite lenders lowering interest rates on their term deposits as well as savings bank accounts. Industry experts believe that customers are likely stocking up capital, owing to the uncertainty that the pandemic has brought.

Although this is the latest quarterly data available on credit and deposit, RBI also publishes fortnightly data on these parameters. For instance, bank credit growth stood at 5.52% y-o-y and deposits increased 11.04% in the fortnight ended 14 August.

Experts believe that the increasing liquidity in the banking system can be attributed to the fact that deposit growth has continued to outpace credit growth. After declining to ₹6 trillion, money parked with the central bank under the reverse repo window has again picked up to reach ₹7.28 trillion as on 3 September. Banks have been parking their excess liquidity with the RBI at a meagre interest rate of 3.35% amidst a dwindling demand for new loans.

“The deposits growth (as of 14 August) has increased faster at 11% as compared to the last two years, where the deposits registered growth between 8-10%. This indicates that the depositors are spending less and instead stocking up funds in bank deposits," Care Ratings said in a note on 29 August.

Care Ratings said that the banking system liquidity is expected to remain in a surplus position, aided by sustained growth in bank deposits as against slower growth in the bank credit off-take.

According to the central bank’s financial stability report in July, deposit growth witnessed a pick-up in the early months of 2020-21, reflecting covid-19 related precautionary savings behaviour. Aggregate deposits of the banking system grew ₹5.09 trillion between 27 March and 14 August, while bank credit shrunk by ₹1.52 trillion in the same period, showed RBI data.

Analysts at Anand Rathi Research pointed out that the year-to-date rise in deposits by over ₹5 trillion is the highest ever in the corresponding periods of any other year in the past.

“Given the marked income, revenue and job losses, the rise in deposit growth seems to be driven by lower transaction demand and precautionary cash preservation in the face of the huge uncertainties created by the pandemic, continued lockdown restrictions and the slide of the business cycle," the Anand Rathi note said on 28 August.