Credit Growth in Indian Banks Surpasses Deposits Amid Shift to Capital Markets

A State Bank of India (SBI) report highlights that credit growth in Indian banks is outpacing deposit growth despite significant investments by households in mutual funds and equities. The trend persists, with substantial increases in credit to the industrial sector and banks using high-cost deposits to meet the rising demand.

The State Bank of India (SBI) has published a report highlighting the sustained upward trend in credit growth among Indian banks, which is consistently outpacing deposit growth. This trend remains strong even as Indian households are significantly increasing their investments in mutual funds and equities, amounting to over Rs 21,000 crore in the past several months.

At a recent event, RBI Governor Shaktikant Das pointed out that households are preferring capital markets over banks for their savings. However, the SBI report indicates that the latest fortnightly credit and deposit growth figures show credit growth continues to outpace deposits, albeit at a moderated rate compared to the 16.2% year-on-year growth observed in June 2023.

The report specifically noted that for the fortnight ending July 12, 2024, credit growth for All Scheduled Commercial Banks was at 14% year-on-year, whereas deposit growth stood at 11.3%. Credit to the industrial sector showed a significant rise, increasing from 5.1% in March 2023 to 8.4% in March 2024, and 8.1% growth in June 2024 year-on-year, reflecting strong industrial demand for credit.

Despite a shift in household savings towards capital markets, banks have managed to accumulate an incremental deposit of Rs 7.02 lakh crore for the year-to-date period ending July 12, 2024. During the same period, incremental credit extended by banks totaled Rs 3.80 lakh crore. This gap underscores the importance of deposit growth in maintaining financial stability. The report also highlighted an increase in banks' reliance on high-cost deposits such as Certificates of Deposit (CDs), which has more than tripled. This adjustment in funding strategies is crucial to meeting the growing demand for loans.

RBI Governor Shaktikant Das reiterated that while bank deposits still make up the majority of household financial assets, their share is declining. Households are increasingly directing their savings towards mutual funds, insurance funds, and pension funds.

(With inputs from agencies.)