Banks added over ₹2 trillion more in deposits than loans in 2024

The gap between fresh deposits and non-food credit widened to over ₹2 trillion in 2024, higher than ₹1.3 trillion in the previous year.  Non-food credit is bank credit adjusted for loans given to the Food Corporation of India (FCI). In 2022, per RBI data, banks added more loans than deposits and the gap between the two was ₹2.6 trillion.

Data for 2023 exclude the impact of the merger of HDFC Ltd into HDFC Bank that added to the banking sector’s loans and deposits.

Deposit crunch

Lenders were troubled by a deposit crunch in 2024, as credit growth outstripped growth in deposits. A subsequent cooling of credit growth has helped a convergence of these two, although credit outstripped deposits yet again in December.

Non-food credit growth was 11.1% in 2024, while deposit growth stood at 9.8% in the same period.

When seen on a full-year basis, higher fresh deposits compared to loans in 2024 has pushed the incremental CD ratio to 89.5%, as against 94% in 2023. The CD ratio indicates how much of a bank’s deposit base is being utilized for loans.

A private sector banker who did not wish to be named said that in absolute terms, deposit accretion will be higher because the denominator is higher, but the loan-to-deposit ratio situation is still worsening because, ideally, any ₹100 deposit would mean a bank can lend only ₹75-76 against it.

Saswata Guha, senior director, financial institutions, Fitch Ratings India, said that 70-75% CD ratio could be considered sustainable, perhaps stretched to 80% or thereabouts during spells of high growth. “But sustained high CD ratio can create challenges for any banking system including India, where bank funding is heavily dependent on deposits, and depositor confidence.”

Shift to alternative investments

Experts said they expect the deposit scenario to improve this year.

“There was a structural shift away from bank deposits into other forms of investments, especially in the markets,” said Vivek Iyer, partner at Grant Thornton Bharat. 

Iyer said that given the kind of correction in the equity markets right now, retail investors are likely to pivot to bank deposits instead. “The CD ratio will also improve as retail investors go back to bank deposits following the market correction,” said Iyer.

The movement of funds into other avenues also found mention in a speech by the then RBI governor Shaktikanta Das. In July, Das had said that households and consumers who have typically been parking funds with banks are increasingly turning to capital markets and other financial intermediaries.

Structural shifts in deposits

“While there could be a debate regarding ‘deposits funding loans’ vis-à-vis ‘loans funding deposits’, the current regulatory concern stems from the fact that there could be structural changes happening which banks need to recognise and, accordingly, devise their strategies,” Das had said.

Bankers believe that credit growth will outpace deposit growth in FY25. State Bank of India chairman C.S. Setty told analysts in November that it expects system deposits will grow 11-12% and credit by 12%-13% in FY25.

“…we continue to ensure that the deposit growth is maintained in terms of two aspects. One is, our market share of 23%, under no circumstances we are going to allow it to go down. Second, while we have adequate liquidity and capitalization to support credit growth, we would like to ensure that the incremental credit growth is supported by the incremental deposits,” Setty said on 8 November.

Others said that given the financialization of savings, Indian households have choices beyond savings deposit and they can park their savings in EPFO, given the choices on equity and debt investment options. Financialization refers to the movement away from traditional investments like real estate and gold towards financial assets.

“Savings is also flowing into insurance premiums and pension schemes from a long-term perspective. In the recent deposit crunch, a lot of focus has gone into direct equity market participation, but this shift away from plain vanilla bank deposit is more structural,” said Deep Narayan Mukherjee, partner and associate director, data science, Boston Consulting Group.

Mukherjee said that savers are more exposed to markets and mutual funds than they were a decade back. There is a higher degree of awareness about returns of these asset classes in comparison to bank deposits.

Credit growth outlook

That said, even when money flows into equity markets, it does end up in a bank account, remaining part of the overall deposits. While it remains in the banking system, retail deposits turn into corporate or bulk deposits that are more expensive and are shorter in tenure.

According to Mukherjee, both current and savings accounts are demand deposits, meaning the money is available on demand. He said that some people let their money lie in savings accounts over the year  despite having the right to withdraw it at any time. He added that the behavioural maturity of such a saver is one year, while legal maturity is 0 days given the on-demand nature of the savings account.

He explained that if a bank has more money in savings account from household savers, there is a higher behavioural maturity as many do not take it out frequently and provide a lot of stability to the bank. However, current account balances especially through bulk depositors can only be deployed for short-term credit as they have very low behavioral maturity of less than a month, he added.