The gap between credit and deposit growth of banks, which was a key concern for the Reserve Bank of India (RBI) over the past two years, is finally narrowing, according to the state of the economy report released by the central bank on Friday.
According to the latest data, as of September 6, the gap was just over 2 percentage points, compared with more than 700 basis points (bps) at the start of 2024. Bank loan growth moderated to 13.3 percent, while deposit growth exceeded 11 percent.
“In the credit market, where deposit mobilization is becoming a challenge, banks continue to rely heavily on certificates of deposit to meet funding needs so that lagging deposit growth does not restrict lending,” the report said.
Noting that banks are offering higher interest rates on deposits, with more than two-thirds of term deposits yielding 7 percent or more, the report says: “However, the gap between credit and deposit growth is beginning to narrow.”
During the August monetary policy review, Governor Shaktikanta Das warned banks to rely more on short-term non-retail deposits and other liability instruments to meet rising credit demand.
The report on the state of the economy also contained a word of warning for microfinance institutions, as it called on those lenders to slow loan growth, citing the buildup of non-performing assets.
“Microfinance institutions are facing some asset quality issues, which justify a slowdown in the pace of loan growth,” the report said.
Another warning concerns the private credit market. According to the report, rough estimates suggest that private credit assets under management amount to around $15 billion. Fintech lenders, which have reportedly captured more than 52% of the personal loan market share, are increasingly turning to private credit to raise funds and diversify borrowing sources.
“However, the resilience of private credit in a credit crisis has not yet been tested,” he said.
Commenting on inflation, the report termed it as a “positive development” that headline retail inflation remained below the RBI’s 4 per cent target.
He also noted that as some vegetable price shocks have started to reverse, the persistence that characterised food inflation developments in the first quarter of 2024-25 “may be behind us”.
Noting that an unfavourable base effect may impact the headline inflation figure for September, the report said the outlook for international crude oil prices has turned benign and could be sustained.
The report notes: “The outlook for average headline inflation of 4.5 percent in the second half of 2024-25, as set out in the Monetary Policy Committee’s August 2024 resolution, has improved,” adding that food price volatility remains a contingent risk, in light of recent experience.
With headline inflation slowing, household consumption is expected to grow faster in the July-September quarter, with the revival of rural demand already taking hold.
“Another factor driving consumption is increased hiring by large e-commerce companies ahead of the festival season, not just in metropolises but also in second- and third-tier cities,” it said. The report also noted that demand for fast-moving consumer goods (FMCG) is accelerating as companies target older customers with healthy lifestyle products in response to increasing longevity.
Regarding the first quarter GDP figures, the report notes that domestic factors (private consumption and gross fixed investment) were solid and that net exports continued to provide positive support to gross domestic product (GDP) growth. “The underperformance of agriculture was offset by a dynamic manufacturing sector and resilient services,” it adds.
First published: September 20, 2024 | 20:52 IS
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