FY24 to witness further rise in credit-deposit ratio of banks

In the last one year, there has been an interesting trend seen in Indian banks. Demand for loans (retail and corporate) has been picking up rapidly, but the growth in deposits has struggled to keep pace. As a result, the Credit-Deposit (CD) ratio has been persistently on the rise. As per recent numbers put out by RBI, the average Credit-Deposit (CD) ratio of banks has surged by 358 basis points in FY23 to 75.8%. 

Many of the private banks like IndusInd Bank, YES Bank, Federal Bank and RBL Bank saw credit growth much higher than deposit growth in Q4FY23. However, the likes of HDFC Bank and Bandhan Bank had deposit growth bettering credit growth. What the banking sector is seeing presently is a fine-tuning problem, with competition between concomitant credit and deposit growth determining the ultimate CD ratio.

Why is credit growth happening so rapidly?

When the pandemic struck in 2020, almost everything had come to a standstill. Credit growth had been much lower on account of economic slowdown and the lockdown. Most people saved up more money which showed in the form of steady growth in bank deposits at around 9-11% during the period. CD ratios fell as lenders shored up their liquidity back then.

However, since the post-COVID rebound, demand for credit has skyrocketed. Buyers have resorted to revenge buying, and showering helicopter money on things like travelling, hotels, airlines since they could not enjoy these facilities during lockdown. There has also been a sharp pickup in real estate activities after a prolonged slump, which will drive growth in housing loans in urban areas. On the industrial front, demand for loans is driven by proposed capex investments in chemicals, sugar, renewable energy, and electronics. The government PLI scheme and China Plus One are the trends driving credit. Credit growth in FY23 has been nearly twice the growth in deposits. 

Why then did deposit growth slacken?

While deposit growth has slackened substantially following the pandemic and a key driver has been the deposit rate lag effect. Now, what exactly is that? Since May 2022, the RBI has hiked rates by 250 basis points. Due to the rapid transmission, the loan yields for banks have almost moved up in tandem. However, the banks have been averse to moving up the deposit rates in tandem. That led to weak demand. However, all that is set to change. With the government withdrawing special tax benefits for debt funds, there is likely to be a rush back to bank FDs. So, effectively, the credit deposit ratio would automatically rectify to a more realistic growth in the coming years. However, FY24 is likely to see the CD ratio continue to be high.

Who Will Dictate Dynamics of the CD Ratio?

Experts and economists estimate that the CD ratio would remain higher than 75% in FY24. However, the deposit growth rate in FY24 would be slower than in FY23. Also, the CD ratio could be normalized as credit growth is expected to decelerate owing to market volatility and high interest rates. There will still be growth in credit but it will be slower. Deposits are also expected to grow quickly; but will still struggle to catch up with credit in FY24.