RBI Report Reveals Shrinking Gap Between Credit and Deposit Growth, Yet Challenges Persist

RBI Report Reveals Shrinking Gap Between Credit and Deposit Growth, Yet Challenges Persist

The Reserve Bank of India (RBI) has reported a significant narrowing in the gap between credit and deposit growth in banks, as highlighted in its latest State of the Economy report released on Friday. As of September 6, this gap has decreased to just over 200 basis points, a notable reduction from over 700 basis points at the beginning of 2024.

Current loan growth among banks stands at 13.3 percent, while deposit growth has increased to more than 11 percent. The report emphasizes that banks are facing challenges in deposit mobilization, leading them to rely heavily on certificates of deposit to fulfill their funding requirements. It notes that over two-thirds of term deposits are now offering interest rates of 7 percent or higher, reflecting banks' efforts to attract more deposits.

However, RBI Governor Shaktikanta Das, during the August monetary policy review, urged banks to be cautious about depending excessively on short-term non-retail deposits to meet rising credit demands.

The report also raises concerns for microfinance institutions, advising them to moderate loan growth due to increasing non-performing assets (NPAs). It highlights that these institutions are encountering asset quality challenges that necessitate a more cautious approach.

Furthermore, the private credit market is under scrutiny, with estimates suggesting that private credit assets under management amount to around $15 billion. Fintech lenders, which hold over 52 percent of the personal loan market, are increasingly exploring private credit as a funding alternative. The report cautions that the resilience of private credit during economic downturns remains untested.

On the inflation front, the report indicates that headline retail inflation has consistently remained below the RBI's 4 percent target, which is viewed as a positive development. It also notes that food inflation pressures stemming from vegetable price fluctuations in early 2024 are beginning to ease, suggesting that inflationary trends may stabilize.

While potential base effects could impact the September inflation figures, the outlook for international crude prices appears favorable, with expectations of a headline inflation average of 4.5 percent for the latter half of 2024-25, as outlined in the August monetary policy resolution. However, it warns of food price volatility as a contingent risk.

With inflation easing, household consumption is projected to rise in the July-September quarter, bolstered by a recovery in rural demand. The report notes a surge in hiring by e-commerce companies ahead of the festival season, extending beyond metropolitan areas to tier 2 and 3 cities. Additionally, demand for fast-moving consumer goods (FMCG) is accelerating as companies adapt their offerings to cater to older consumers seeking healthy lifestyle products.

Finally, the report highlights robust domestic factors driving GDP growth in the first quarter, notably private consumption and gross fixed investment, while net exports provided additional support. It mentions that while agriculture underperformed, strong performance in the manufacturing sector and resilient services helped compensate for this shortfall.