Bank credit and deposits cannot keep running at very different levels for a long period of time and are likely to converge at around 13%, bankers said.

India’s bank loan growth is expected to moderate as deposits continue to lag behind in a tight liquidity environment. 

The pressure on deposit-credit balance will remain in the next financial year with the Reserve Bank of India (RBI) continuing to work on liquidity to tackle inflation. 

“We do expect the deposit growth to remain constrained. And as a result, over a period of time, the credit growth has to temper down,” said Axis Bank managing director and CEO Amitabh Chaudhry. 

The ability to grow on the deposit side will determine how much banks can grow. Though the deposit growth has rebounded to a certain extent, the credit growth momentum has sustained. This has increased the wedge between the deposit and credit growth. 

As on 12 January 2024, all scheduled commercial bank credit grew by almost 20% compared to 16% a year ago. Deposits, on the other hand, grew by 13% versus 11% last year.

“The deposit growth in the system is a challenge with a tight liquidity environment. We expect this to continue till inflation reaches the lower bound of the range. We foresee the system credit growth to converge towards deposit growth of around ~13%,” Chaudhry told analysts in a post earnings call after the fiscal third quarter results.

Banks were enjoying excess liquidity since the first quarter of FY20 when Covid-19 created havoc in the economy. “If you look at last 10 years, there have been several quarters in the past, in 2013 or in 2015, where it (system liquidity) has been negative. But this order of magnitude is very recent…So we do need deposits to be kicking in for the loans to be operating,” HDFC Bank chief financial officer Srinivasan Vaidyanathan told analysts.

According to India Ratings and Research, the deposit growth is likely to moderate to 12-13% in FY25 from the 13.8% estimated for the current fiscal. 

The loan-to-deposit ratio for the sector is at a five-year high of 81%, making deposit growth a crucial part in banks' credit book expansions.

“The lagging deposit growth will be the key theme for banks for FY25 as this has resulted in loan deposit ratio (LDR) increasing above 80%,” Karan Gupta, head and director of financial institutions at India Ratings, said.

The loan book mix for banks is likely to change in FY25 due to the dip in shares of exposures to the retail and non-bank lenders segments, the agency said, adding that a revival in private capex will help increase the share of corporate lending in the overall pie.

"The improving return on assets over FY21-FY24 is likely to reach an inflection point with some pressure on margins and credit costs reaching multi-year lows," said Gupta.

The mix of deposits has changed with the increase in policy rates and banks increasing the rates on term deposits. This has led to a decline in the low-cost current and savings account balances, or CASA ratio, for the system by around 3 percentage points from the March quarter of FY22 to the June quarter of FY24, owing to the movement of funds from CASA to better-yielding products, the agency said.

"With the current interest rate cycle likely to reverse in the latter half of FY25 and depending upon its progress, some of the funds could return to CASA balances, thus improving the system CASA ratio," it said.