RBI ON DEPOSIT GROWTH 

1. Context

2. Key points

• Acknowledging the role played by private commercial banks in supporting economic growth during the pandemic and in the ongoing financial market turmoil, the Governor advised that banks "Remain watchful" of the evolving macroeconomic situation, including global spillovers.
• Discussion points included the lagging growth in deposits about credit growth, asset quality and adoption of new-age technology solutions among other things.

3. Remain watchful

1. Russian actions in Ukraine impacting energy supplies and prices (especially in Europe),
2. An economic slowdown in China because of frequent lockdowns due to its zero-Covid policy and
3. The increased cost of living is because of resulting inflationary pressures.

1. Lower external demand drives down export demand obligating economic growth to be solely driven by domestic demand which might not be sufficiently strong.
2. Higher global inflation and interest rates impact the flow of capital into the economy, putting downward pressure on the domestic currency and in certain circumstances, higher imported inflation.

4. Deposit growth vis-a-vis credit growth

• Banks' credit-disbursing bandwidth is determined by their in-house reserves.
• More importantly, demand for credit increases with greater economic activity.
• As per the RBI bulletin, aggregate demand domestically bears an "uneven profile" at present.
• Urban demand appears robust and rural demand which was muted has also started acquiring some strength recently.
• Commercial bank credit growth too has been surging, led by services, personal loans, agriculture and industry, in that order.
• This reflects the growing preference for bank credit for meeting working capital requirements.

5. Concerning deposit growth and credit growth

• It is not that deposit growth has fallen materially, but that credit growth has risen in the last few quarters.
• During the pandemic, owing to lower economic activity credit growth was on a lower trajectory.
  Now with economic activity returning to normalcy, credit growth has picked up, especially in the previous three quarters.
• Analysts have also pointed to deposit rates not going up as another reason for slower deposit growth.
• While banks passed on higher rates through loan portfolios, most of which were at floating rates, the approach was much measured concerning deposit rates.
• Though this helped banks' net interest margins, it did not bolster their bandwidth to disburse further credit.

6. Banks' asset quality

• RBI's November bulletin informed that gross non-performing assets (GNPAs) have consistently declined, with net NPAs sliding down to 1 per cent of total assets.
• Liquidity cover is robust and profitability is shored up.
• However, market participants have raised concerns concerning corporates in light of the macroeconomic situation.
• We can expect asset quality to improve on the corporate loan book.
• The reason is the deleveraging that has happened in corporate India over the years wherein most corporates have been able to cut down on their debt level and improve their credit profiles.

• However, MSME NPAs, whose lending share forms about 15 per cent of the bank's loan book go up.
• Irrespective, overall NPAs for banks are still expected to come down in the near to medium term as the corporate segment, which accounts for about 45 per cent of the loan books, drives the downward run.

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