Deposit Growth Trails Behind Credit Expansion in March Quarter: Banking Sector Insights

The latest financial quarter has revealed a significant trend in the Indian banking sector, where deposit growth continues to lag behind credit expansion. This pattern, observed across most banks, has been influenced by multiple factors, including liquidity challenges, market dynamics, and strategic lending decisions. The fiscal fourth quarter, which ended in March, saw credit growth outpacing deposit growth in most major banks, including both public and private sector institutions.

Overview of the Trend

In the March quarter, many banks faced challenges in matching their credit growth with deposit growth. This imbalance is evident in both public sector banks (PSBs) and private banks, although some exceptions exist. For instance, Punjab National Bank (PNB) and HDFC Bank managed to buck this trend, with PNB's deposits rising faster than its credit, and HDFC Bank focusing on stabilizing its credit-to-deposit ratio post-merger with its parent company, HDFC Ltd.[1].

Factors Contributing to the Lag

Several factors have contributed to this disparity:

• Liquidity Issues: The banking sector has experienced liquidity deficits, impacting deposit growth. To manage this, banks have resorted to certificates of deposit and other funding sources, which come at a higher cost[2].
• Interest Rates: Elevated term deposit rates have attracted more funds into term deposits but have not been enough to match the pace of credit expansion. The recent decrease in the Short-term Weighted Average Call Rate (WACR) also reflects efforts to manage liquidity[2].
• Credit-Deposit Ratio: The credit-to-deposit (CD) ratio has increased, reaching above 80%, indicating a higher reliance on credit compared to deposits. This imbalance poses challenges for banks in managing their liquidity efficiently[2].

Performance of Key Banks

Public Sector Banks

• Bank of Baroda and Union Bank of India both experienced single-digit deposit growth, while their credit expanded more rapidly. Bank of Baroda saw domestic deposits rise by 9.28%, while credit grew by 13.7% year-on-year[1].
• Central Bank of India and Punjab & Sind Bank also reported higher credit growth than deposit growth, with Central Bank recording a 16.20% increase in loans against a 7.18% rise in deposits[1].
• Bank of India missed its deposit growth target, with credit expanding 14.28% compared to an 11.21% increase in deposits[1].

Private Banks

• HDFC Bank, despite slower credit growth due to post-merger adjustments, saw deposits grow at a higher rate than advances. The bank deliberately reduced its credit growth to stabilize its CD ratio[1].
• IDFC First Bank was among the few banks where deposit growth outpaced credit. Deposits increased by 25.2% compared to a 20.3% rise in loans and advances[1].

Impact on Banking Sector Dynamics

The imbalance between credit and deposit growth has significant implications for the banking sector:

• Liquidity Management: Banks face challenges in managing liquidity effectively, necessitating innovative funding strategies such as issuing certificates of deposit at higher costs[2].
• Risk Management: An elevated CD ratio increases the risk for banks, as it indicates a higher reliance on credit that may not be fully supported by deposits[2].
• Future Prospects: With the Reserve Bank of India (RBI) potentially reducing interest rates, this could influence deposit dynamics and encourage more funds into the banking system, potentially balancing the CD ratio[1].

Strategic Adjustments by Banks

To address the imbalance and manage liquidity effectively, banks are adopting several strategies:

• Enhancing Term Deposits: Banks are offering higher interest rates on term deposits to attract more funds. This has resulted in a significant increase in term deposits, particularly those generating over 7% interest[2].
• Funding Through Certificates of Deposit: There has been a notable increase in the use of certificates of deposit by banks to meet their funding requirements[2].
• Securitizing Loans: Banks like HDFC Bank have securitized loans to manage their credit exposure and stabilize their CD ratio[1].

Market Impact and Future Outlook

The gap between deposit and credit growth highlights the complexities and challenges facing the Indian banking sector. As banks navigate these dynamics, the sector's ability to manage liquidity effectively will be crucial. With potential interest rate adjustments by the RBI, the focus will be on how these changes impact deposit growth and the overall CD ratio.

Key Trends and Statistics

• Deposit Growth: Overall deposits grew by about 10.3% year-on-year as of February 2025, slightly lower than previous years[2].
• Credit Growth: Credit offtake increased by around 11% year-on-year, outpacing deposit growth[2].
• CASA Deposits: Current and savings account (CASA) deposits saw moderate growth in some banks but are generally not keeping pace with credit expansion[1][3].

In conclusion, the persistent lag between deposit and credit growth in the Indian banking sector underscores the need for strategic management of liquidity and risk. As banks adapt to these challenges, their ability to navigate market conditions and regulatory changes will play a crucial role in shaping the sector's future trajectory. With ongoing adjustments in interest rates and funding strategies, the banking sector is poised for a significant transformation in how it manages deposits and credit expansion.

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