Private banks take the lead as the gap between credit and deposits widens amid strong economic activity
Credit growth in the Indian banking sector continues to outpace deposit growth, increasing by 18.8% year-on-year in Q1 FY25, according to a new report by CareEdge Ratings. A surge in credit demand from personal loans and lending to MSMEs has led to total credit reaching Rs 26.4 billion, with private sector banks (PVBs) leading the expansion.
In contrast, deposit growth lagged at 12.1% year-on-year, reaching Rs 207.5 million as of June 2024. Term deposits performed well, rising 16.6% due to higher interest rates, while current and savings accounts (CASA) grew more slowly. It was 5.7%.
The widening gap between credit and deposits
Despite strong credit demand, the credit deposit (CD) ratio rose to 80.4% by June 2024, registering an increase of 457 basis points year-on-year. In particular, as credit expansion continues at a faster pace, the gap between credit and deposit growth has widened, creating liquidity challenges for banks.
Private banks drive credit growth
Private sector banks reported credit growth of 27.7%, significantly higher than the 13.2% recorded by public sector banks (PSBs). This gave PVB a larger market share, accounting for 41.9 percent of total credit. The flexibility, technological advances, and merger benefits enjoyed by private banks have fueled their aggressive growth strategies.
In terms of deposit growth, PVBs also outperformed PSBs, with 18% growth compared to 8% growth for public sector banks. Higher interest rates on fixed deposits offered by private banks have attracted more customers, which has contributed to their strong performance.
regional trends
Within the region, central and southern India led the credit growth with rates of 23.8% and 20.9%, respectively. The western region, which includes major economic centers such as Mumbai and Pune, maintained its dominance and contributed the most to credit and deposit growth. The Northeast region had the lowest growth rate at 16.1%.
Outlook for FY25
The report expects credit growth to gradually slow as deposit mobilization continues to lag. Banks may face further pressure as CD ratios remain high and liquidity is tight. However, the report expects some easing in the form of potential interest rate cuts in the second half of FY25, which could help boost deposit growth and narrow the credit-deposit gap.
The report concludes that the strong credit demand seen in the first quarter of 2025 reflects underlying economic activity, but that banks face liquidity constraints for sustained growth. It warns that improved deposit mobilization is needed to ensure that credit demand can be met without the need for credit.
As the financial year progresses, banks will need to focus on strengthening their debt franchise and improving their CASA ratios to maintain a balanced credit deposit growth trajectory.
