Bank credit growth beyond 18 per cent may lead to higher impairments, cautioned the Reserve Bank of India.
“Despite the divergence in credit and deposit growth, elevated C-D (credit-deposit) ratio and narrowing credit-GDP gap, credit growth at 16.1 per cent as on May 31, 2024 (net of merger of a housing finance company with a bank) remains sustainable and within the range of 16-18 per cent beyond which it may lead to higher impairments,” the central bank said in the latest financial stability report.
The RBI noted that the growing gap between credit and deposit growth is reflected in a rising C-D ratio, which has been on the ascent since September 2021 to peak at 78.8 per cent in December 2023 before moderating to 76.8 per cent at end-March 2024.
The C-D ratio of private sector banks (PVBs) has been particularly high - over three fourths of the banks with C-D ratios above 75 per cent are PVBs
With credit growing at a brisk pace and outpacing nominal GDP growth for seven consecutive quarters, the credit-GDP gap (that is the difference between the credit-GDP ratio and its long-term trend) has sharply narrowed to (-) 2.1 per cent in Q3 (October-December) FY24 from (-) 7.4 per cent Q3FY23.
Credit and deposit growth divergence
The RBI observed that there have been episodes of credit and deposit growth divergence persisting for 2 to 4 years. A decomposition of seasonally adjusted aggregate deposits (deflated by Consumer Price Index-based inflation) into their trend and cyclical components using turning point analysis shows that the average duration of these cycles is 41 months.
“Moreover, in this cycle, the merger of a large housing finance company with a bank has exacerbated the credit and deposit growth divergence.
“In addition, Granger causality shows that credit growth precedes deposit growth. Convergence has been mostly achieved through a sharp fall in credit growth,” per RBI’s assessment.
In the current cycle, the C-D ratio is close to its peak after adjusting for reserve requirements -- that is cash reserve ratio (CRR) and statutory liquidity ratio (SLR).