Credit Growth Continues To Outpace Deposits In Q1 FY25: Report
Private sector banks lead the charge as credit-deposit gap widens amid strong economic activity
Credit growth in India’s banking sector continues to outpace deposit growth, rising by 18.8 per cent year-on-year (y-o-y) in Q1 FY25, according to a new report by CareEdge Ratings. The surge in credit demand, driven by personal loans and lending to MSMEs, has pushed the overall credit to Rs 26.4 lakh crore, with private sector banks (PVBs) leading the expansion.
In contrast, deposit growth lagged at 12.1 per cent y-o-y, reaching Rs 207.5 lakh crore as of June 2024. Term deposits showed strong performance, growing by 16.6 per cent due to higher interest rates, while Current and Savings Accounts (CASA) grew more moderately at 5.7 per cent.
Widening Credit-deposit Gap
Despite robust credit demand, the Credit-Deposit (CD) ratio increased to 80.4 per cent by June 2024, marking a 457-basis point rise from the previous year. The widening gap between credit and deposit growth has resulted in liquidity challenges for banks, especially as credit expansion continues at a faster pace.
Private Sector Banks Drive Credit Growth
Private sector banks reported a credit growth of 27.7 per cent, significantly higher than the 13.2 per cent recorded by public sector banks (PSBs). This has allowed PVBs to gain a larger market share, accounting for 41.9 per cent of the total credit. The flexibility, technological advancements, and merger benefits enjoyed by private banks have fuelled their aggressive growth strategies.
In terms of deposit growth, PVBs also outperformed PSBs, growing by 18 per cent compared to the 8 per cent growth seen by public banks. Higher interest rates on term deposits offered by private banks have attracted more customers, contributing to their stronger performance.
Regional Trends
Among regions, the central and southern parts of India led credit growth, with rates of 23.8 per cent and 20.9 per cent respectively. The western region, which includes major economic centres such as Mumbai and Pune, maintained its dominance, contributing the largest share of credit and deposit growth. The north-eastern region saw the lowest growth of 16.1 per cent .
Outlook For FY25
Report anticipates a gradual slowdown in credit growth as deposit mobilisation continues to lag. With the CD ratio remaining high and liquidity tightening, banks may face further pressure. However, the report expects some relief in the form of potential interest rate cuts later in FY25, which could help boost deposit growth and narrow the credit-deposit gap.
The report concludes that the strong credit demand seen in Q1 FY25 reflects underlying economic activity, but cautions that sustained growth will require improved deposit mobilisation to ensure banks can meet credit demand without facing liquidity constraints.
As the fiscal year progresses, banks will need to focus on strengthening their liability franchise and improving CASA ratios to maintain a balanced credit-deposit growth trajectory.
