Banks need a deposit boost

The Governor of the Reserve Bank of India expressed concern over slow deposit growth and sought views from the banking sector on the sustainability of credit as well as risk-free operations in high credit growth. To deliberate the issue of rising credit, Governor Shaktikanta Das called a meeting of the chiefs of public sector banks on November 16.

The concern has been that the public sector bank deposits have not shown any significant decline since the first quarter of 2019. In fact, deposits rose to Rs 102.198 trillion in the fourth quarter of 2021–22 but further declined to Rs 101.557 trillion in the first quarter of 2022–23. The RBI expressed concern earlier in August that credit growth had accelerated up to 14.2 per cent (year-on-year growth) in June 2022, from 6 per cent a year ago and 10.8 per cent a quarter before. This concern would become evident if we plotted the graphs for credit-deposit ratios. Even though the credit growth has been broad-based and has infused confidence among consumers as well as investors, the growth in deposits raises a few important concerns.

The year-on-year growth of aggregate deposits remained in the 9.5 per cent to 10.2 per cent range, and that is a matter of concern. It is true that the urban banks have been doing far better, as have the private sector banks, which have increased their deposit growth from Rs 40.656 trillion in the first quarter of 2020-21 to Rs 53.242 trillion in the first quarter of 2022–23. In fact, the credit flow from the private bank sector has only marginally increased by Rs 3.66 trillion as compared to Rs 4.55 trillion in the public sector banks.

The credit-deposit (C-D) ratio, which is one of the crucial indicators of the health of the banking sector, is one of the analytical points usually discussed in the macroeconomic framework. It is essentially the ratio of the bank’s assets to its liabilities and depicts the liquidity in the banking system. The ratio may also be considered an indicator of how much of the bank’s core funds are being used for lending, which is the primary business of the bank and helps generate funds for the banking system. A high CD ratio indicates that loans disbursed exceed deposits received, indicating appropriate use of resources, whereas a low CD ratio raises questions about the efficiency of the banking system as resources remain underutilised, negatively affecting the bank’s bottom line.

While the RBI has not stipulated a band for the C-D ratio, extreme values of the ratio may have dire consequences for the banking system. A very high C-D ratio would indicate a stress on the banking sector, requiring deposit mobilisation, which has declined in the post-demonetisation period. Further, a high ratio may also raise concerns regarding liquidity availability to cover unforeseen fund requirements as well as capital adequacy. The C-D ratio also does not reflect the quality of loans or the number of defaults, concerns that have plagued the banking system since time immemorial.

It is not that the general public has lost the faith in banks but rather the very low rates of interest on the deposits in the public sector banks as against the lucrative schemes provided by the private sector banks as well as the financial intermediaries competing for deposits with the general public.

The RBI has noted in its press release that the credit growth is outpacing the deposit growth and that the
C-D ratio stood at 73.5 per cent, which was 75.5 per cent a year ago. This
is very high in the metropolitan sector as compared to the rural sector. It is therefore critical to sound an emergency alarm to the banking sector, informing them that they must tighten their shoelaces and pull their shirts up in order to bring
in a robust growth in depo-
sits and maintain a healthy
balance sheet.

A high CD ratio reduces the banks’ ability to lend and may also put pressure on the cash reserve ratio. That will be a dangerous outcome and may indicate an emergency situation at least for some of the weaker banks. Sounding an alarm is always better than getting into a firefighting situation and setting the house right after the damage is done.

(Dhume is Professor of
Economics at Prin. L. N. Welingkar Institute of Management Development and Research, Bengaluru and Deshpande is Former Director of ISEC, Bengaluru)