Bank Credit and Deposits Growth Decelerate in Third Quarter, Shows RBI Data February 22, 2025 by
Bank Credit and Deposits Growth Decelerate in Third Quarter, Shows RBI Data
The latest data released by the Reserve Bank of India (RBI) reveals that bank credit and deposit growth witnessed a slowdown in the third quarter of the financial year. The deceleration, which comes amid shifting economic conditions and evolving financial market dynamics, has raised concerns about liquidity and credit demand in the banking sector.
Overview of RBI Data
According to the RBI’s quarterly report, the year-on-year growth of bank credit dropped from the previous quarter’s pace, while deposit growth also registered a decline. The slowdown in credit expansion can be attributed to multiple factors, including tighter monetary conditions, cautious lending practices, and a softening demand for loans across sectors.
Key Findings from the Data
- Credit Growth Slows Down:
- The overall bank credit growth stood at a lower percentage compared to the previous quarter.
- The slowdown was observed across key sectors, including industry, services, and retail lending.
- Lending to micro, small, and medium enterprises (MSMEs) showed signs of moderation despite continued policy support.
- Deposit Growth Weakens:
- The growth in bank deposits saw a marginal decline, impacting the liquidity available for lending.
- Public sector banks reported a sharper drop in deposit inflows compared to private banks.
- Fixed deposits remained the preferred mode of savings, while savings account growth was subdued.
- Sectoral Credit Trends:
- Industrial Credit: Credit to large industries showed muted expansion due to lower capital expenditure by firms.
- Retail Loans: Growth in housing, vehicle, and personal loans continued but at a slower rate.
- Agricultural Credit: The farm sector saw a steady flow of credit, supported by government initiatives and rural lending programs.
- Service Sector Credit: Loans to trade, hospitality, and transport sectors remained under pressure due to economic uncertainties.
Factors Contributing to the Slowdown
Several macroeconomic and policy-related factors contributed to the deceleration in credit and deposit growth:
- Monetary Tightening: The RBI’s rate hikes in previous quarters resulted in higher borrowing costs, discouraging loan demand.
- Global Economic Conditions: A slowdown in global trade and investment affected domestic corporate borrowing decisions.
- Liquidity Management by Banks: Banks maintained a cautious approach to lending, given concerns over asset quality and potential risks.
- Rising Competition from Alternative Investment Avenues: Mutual funds, corporate bonds, and digital lending platforms attracted a share of investor funds, impacting traditional bank deposits.
Implications for the Banking Sector
The deceleration in bank credit and deposit growth has implications for overall economic momentum and financial stability:
- Impact on Economic Growth: Slower credit expansion can affect consumption and investment, key drivers of economic activity.
- Challenges for Banks: Lower deposit growth may constrain banks’ ability to fund new loans, potentially leading to tighter liquidity conditions.
- Policy Considerations: The RBI may consider policy interventions to encourage credit flow and improve liquidity management in the banking system.
Future Outlook
Experts believe that credit and deposit growth may stabilize in the coming quarters, supported by:
- A potential pause or reversal in monetary tightening if inflation remains under control.
- Government stimulus measures and infrastructure spending, which could drive credit demand.
- Increased digital banking penetration, improving financial inclusion and deposit mobilization.
- Enhanced credit risk management practices, ensuring a balanced approach to lending.