The Reserve Bank of India’s (RBI) recent measures to attract foreign capital are expected to strengthen deposit mobilisation and help narrow the gap between deposit and credit growth in the coming months, analysts and bankers said.
According to the latest fortnightly data released by the RBI, banking system credit growth accelerated to 17.65% year-on-year as of May 30, the highest level in two years. Deposit growth, however, remained largely stable at around 12.2 % over the past two months. The system-wide credit-deposit ratio stood at 82.75% at the end of May.
Projected Convergence of Credit
In a recent report, SBI Ecowrap estimated that the RBI’s measures could lift banking system deposit growth in FY27 to 14.5–15 %, compared with a potential credit growth rate of 16%.
“This will mean that the credit-deposit gap, after adjusting for regulatory dispensation, will shrink by around ₹1 lakh crore. This will ensure that the term structure of interest rates declines further,” the report said.
The report also noted that following the mobilisation of foreign currency non-resident (bank) [FCNR(B)] deposits in FY14, deposit and credit growth rates had converged.
“Assuming inflows of $40–50 billion, that would amount to nearly 2.5–3 % of the banking system’s total deposit base. Since these funds are expected to come in within four months, they would also help improve the credit-deposit ratio,” said a senior private sector banker.
Systemic Liquidity
Rating agency ICRA expects both credit and deposit growth to receive a boost from the RBI’s measures.
“The forex measures announced by the RBI are expected to result in sizeable inflows of foreign currency deposits. While it is difficult to quantify the inflows at this stage, they should support a healthy increase in deposit growth for banks,” said Sachin Sachdeva, vice-president and sector head, Financial Sector Ratings, ICRA.
“Since these deposits are exempt from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements, they will increase the availability of lendable funds, thereby supporting credit growth as well,” he added.