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Slow Deposit Growth

Deposit Growth Vis-A-Vis in India

  • As per the RBI’s latest weekly data for scheduled commercial banks, aggregate deposits have grown 8.2% in comparison to 11.4% on a year-over-year basis whereas credit off-take has jumped 17% in comparison to a 7.1% increase on a YoY basis.
  • Reasons for higher credit growth: The surge in credit growth is mainly attributed to the post-pandemic recovery of economic activities.
    • The growth is chiefly led by services, personal loans, agriculture and industry, in that order.
    • This credit growth reflects the growing preference for bank credit for meeting working capital requirements.
  • Reasons for slow deposit growth: Analysts have observed that it is not that deposit growth has fallen materially, but that credit growth has risen in the last few quarters.
    • Analysts have also pointed to deposit rates not going up as another reason for slower deposit growth.

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Deposit Growth Rate in India Highlights

  • Global Headwinds: Banks have been asked to remain watchful because of the current global headwinds which are emanating from three main sources:
    • Russian actions in Ukraine impacting energy supplies and prices (especially in Europe),
    • Economic slowdown in China because of frequent lockdowns due to its zero-COVID policy,
    • And the increased cost-of-living because of resulting inflationary pressures.
  • Financial Stability Risk: Due to the global slowdown, monetary policies across the globe, especially of advanced economies, are being tightened, spurring concerns about financial stability risk in emerging and developing economies. The ‘drag’ occurs in two broad ways:
    • Firstly, lower external demand drives down export demand, obligating economic growth to be solely driven by domestic demand which might not be sufficiently strong.
    • Second, higher global inflation and interest rates impact the flow of capital into the economy, putting downward pressure on domestic currency and in certain circumstances, higher imported inflation.


Deposit Growth in India Banks

  • Asset Quality:
    • RBI’s November bulletin informed that gross non-performing assets (GNPAs) of banks have consistently declined, with net NPAs sliding down to 1% of total assets.
    • Corporate NPAs are expected to come down in the current and upcoming fiscals due to the setting up of the National Asset Reconstruction Company Ltd which is expected to take over some of the legacy corporate loan NPAs which are still with banks.
    • However, MSME NPAs, whose lending share forms about 15% of the banks’ loan book, are expected to go up.


National Asset Reconstruction Company Ltd (NARCL)

  • NARCL was announced in the Union Budget 2021 for aggregation and resolution of Non-Performing Assets (NPAs) in the Banking Industry.
  • The plan is to create a bad bank to house bad loans of Rs 500 crore and above, in a structure that will contain an asset reconstruction company (ARC) and an asset management company (AMC) to manage and recover bad assets.
  • NARCL is registered with the RBI as an Asset Reconstruction Company under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
  • NARCL a government entity, with majority stake held by Public Sector Banks and balance by Private Banks with Canara Bank being the Sponsor Bank.
  • How is NARCL different from existing ARCs? How can it operate differently?
    • The NARCL will have a public sector character since the idea is mooted by the government and majority ownership is likely to rest with state-owned banks.
    • At present, ARCs typically seek a steep discount on loans. With the NARCL being set up, the valuation issue is unlikely to come up since this is a government initiative.
    • The government-backed ARC will have deep pockets to buy out big accounts and thus free up banks from carrying these accounts on their books.
Deposit Growth Rate in India
Deposit Growth Rate in India

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