Bank credit growth picks up, deposit growth lag behind

Highlights:

• The Reserve Bank of India's latest data reveals a significant growth in non-food bank credit (NFBC), which increased by 15.1% to Rs 162.92 lakh crore as of July 2024.
• This growth, however, outpaces the deposit growth of banks, which lagged at 11.3%, raising concerns about the credit-to-deposit (CD) ratio and the sustainability of current credit growth rates.

Key Highlights:

1. Non-Food Bank Credit Growth:

• NFBC registered a robust 15.1% growth, reaching Rs 162.92 lakh crore in July 2024, slightly higher than the 14.7% growth recorded in the same period last year. This surge reflects a strong demand for credit across various sectors of the economy.

2. Slower Deposit Growth:

• Deposit growth at banks has not kept pace, growing at 11.3% to Rs 213.28 lakh crore. The slower deposit growth is partly due to customers shifting their funds to alternative investment avenues like capital markets, which offer better returns.

3. Sectoral Credit Trends:

• Agriculture and Allied Activities: Credit growth in this sector remained robust, registering an 18.1% increase to Rs 21.55 lakh crore, compared to 16.7% a year ago.
• Industry: Credit growth to the industry sector strengthened to 10.2% in July 2024, up from 4.6% in July 2023. Notable sectors include chemicals, food processing, petroleum, and infrastructure, which saw higher credit growth, while metals and textiles experienced moderate growth.
• Services Sector: Credit growth to the services sector moderated to 15.4% from 19.7% a year ago, largely due to lower credit growth in NBFCs and trade segments. However, sectors like commercial real estate, tourism, hotels, and software saw accelerated credit growth.

4. Personal Loans and Credit Cards:

• Personal loans saw a slower growth rate of 17.8% to Rs 51.39 lakh crore in July 2024, compared to 18.4% last year. This was primarily due to moderation in other personal loans and vehicle loans, although housing loans continued to grow.
• Credit card outstanding growth declined sharply to 22% from 32.4% a year ago, indicating a cautious approach by consumers and banks alike.

5. Credit-to-Deposit Ratio and Regulatory Measures:

• The CD ratio hit an all-time high of 78% as of March 2024, reflecting the imbalance between credit and deposit growth.
• Following regulatory advisories to banks, the CD ratio slightly dipped to 77.1% by June 2024.
• The Reserve Bank of India's regulatory measures, including increasing risk weights for high-growth loan segments and revising the Liquidity Coverage Ratio (LCR) framework, are expected to moderate credit growth in the coming fiscal year (FY2025).

6. Future Outlook:

• Credit growth is projected to slow down to 11.6-12.5% in FY2025, compared to 16.3% in FY2024. Similarly, deposit growth is expected to moderate to 9.5-9.8% in FY2025.
• Banks may need to adjust their credit growth targets and enhance liquidity buffers ahead of the revised LCR norms set for implementation in April 2025.

Prelims Takeaways:

• NBFC
• LCR norms