A new SBI Economic Research report warns that the substantial credit-deposit growth gap, currently over 530 basis points, is likely to remain elevated if geopolitical risks and external supply shocks continue, though FCNR(B) deposit inflows could improve deposit growth dynamics.
Key Points
- The credit-deposit growth gap, currently exceeding 530 basis points, is projected to remain high due to persistent geopolitical risks and external supply shocks.
- Deposit growth is expected to improve with increased inflows into foreign currency non-resident (bank) or FCNR(B) deposits.
- Crude oil price shocks significantly influence credit growth, while food inflation increasingly impacts deposit growth over longer periods.
- Banks are advised to adopt new liquidity management strategies during geopolitical tensions to manage the elevated credit-deposit gap.
- Structural shifts in bank deposits include saturation in metropolitan areas, a preference for term deposits, and an increase in the one-to-three-year maturity bucket.
If geopolitical risks and external supply shocks persist, the gap between credit and deposit growth, which currently stands at over 530 basis points (bps), is likely to remain elevated, according to an SBI Economic Research report released on Monday.
However, the report said deposit growth is expected to improve with inflows into foreign currency non-resident (bank), or FCNR(B), deposits, potentially altering the dynamics.
Impact of Supply Shocks on Banking Aggregates
The report said that when supply-side shocks are transmitted asymmetrically across banking aggregates, bank credit growth responds more strongly than deposit growth.
"Crude oil shocks are the dominant source of such variation in credit, while food inflation becomes increasingly important for deposits over longer horizons.
"Furthermore, the impact of food inflation on deposits accumulates over time rather than dissipating," the report said.
In 2004-05, when the average crude oil price was $41.3 per barrel, more than 40 per cent higher than $29 per barrel in the previous year, bank credit grew 21.7 per cent while deposits rose 14.1 per cent.
Strategic Liquidity Management and Long-Term Decoupling
The report said banks need to adopt a different liquidity management strategy during periods of geopolitical tensions and external supply shocks, as these can keep the credit-deposit growth gap elevated.
It added that food inflation plays a significant role in deposit mobilisation, although the impact of food price pressures arising from deficient rainfall has so far remained contained.
The report also stressed that long-term energy decoupling is crucial for sustaining stable economic growth and capital formation.
According to RBI data, bank credit growth stood at 18.6 per cent year-on-year (Y-o-Y) at the end of June, while deposit growth was 13.3 per cent.
Structural Shifts in Bank Deposits
The report identified three major structural shifts in bank deposits, a proxy for demand-side trends, since the Covid-19 pandemic.
First, traditional deposit markets in large metropolitan centres have begun to saturate, with deposit growth increasingly shifting towards semi-urban and rural areas.
The report attributed this trend to rising women's empowerment and the expansion of women-centric government schemes.
Second, there has been a marked preference for term deposits across broad institutional categories, including non-financial and financial corporations, alongside a shift in household savings behaviour.
Census towns are emerging as new hubs for institutional deposits, while banks are increasingly mobilising current account and savings account (CASA) deposits from institutional sources.
Third, the growing preference for term deposits has altered the contractual maturity profile of deposits, with the share of the one-to-three-year maturity bucket increasing as banks seek to better align assets and liabilities under the external benchmark lending rate (EBLR) regime.
The report added that ongoing FCNR (B) deposit mobilisation could further increase the share of the five-year maturity bucket, as most inflows so far have been concentrated in that tenor.
