The gap between credit and deposit growth as of the first fortnight of January 2024 has widened vis-a-vis the last fortnight of September 2023 even as the former continues to outpace the latter on year-on-year (y-o-y) basis, going by RBI data.

As on January 12, 2024, credit and deposit growth stood at 19.93 per cent and 12.84 per cent y-o-y, respectively, resulting in a gap of 7.09 percentage points between the two, per RBI data on scheduled banks’ statement of position in India.

In the last fortnight of September (22nd), the gap between credit growth (19.42 per cent y-o-y) and deposit growth (12.94 per cent) was relatively lower at 6.48 percentage points.

During the reporting fortnight ended January 12, 2024, scheduled banks’ credit outstanding increased by ₹10,277 crore even as deposits declined by ₹98,848 crore, according to the statement.

“Healthier balance sheets have facilitated broad-based expansion in lending by banks. Bank credit growth continues to outpace deposit growth on the back of sustained momentum of demand,” RBI said in its last Financial Stability Report (FSR).

Deposit growth is lagging credit growth as other investment avenues such as non-convertible debentures and equity markets are currently offering higher returns vis-a-vis bank deposits, say market experts.

A longer-term analysis indicates the tendency of bank credit and deposit growth to converge though they diverge frequently in the short-term, per the report.

“An error correction model suggests that around 8 per cent of any divergence between credit and deposit growth is eliminated every month. Consequently, the incremental credit-deposit (CD) ratio has fallen to 96.2 per cent by December 1, 2023 from a peak of 133.8 per cent on November 04, 2022,” FSR said.

RBI noted that rising interest rates have benefitted banks and improved their net interest margins (NIM), as the transmission to yield on assets has been faster than that to the cost of funds.

“Nevertheless, as the rate cycle approaches its peak, banks’ profitability is expected to come under pressure due to rising valuation losses, increasing risks for asset quality and tempering of credit growth,” the central bank said.