With bank deposits on the decline, the Reserve Bank of India (RBI) is nudging banks to rethink their approach to savings and adapt to evolving consumer behaviours. Data from the RBI show that the credit-deposit (CD) ratio has reached 80% in March 2024, marking its highest level since 2005.
With bank deposits on the decline, the Reserve Bank of India (RBI) is nudging banks to rethink their approach to savings and adapt to evolving consumer behaviours. The RBI governor has called for a balanced approach between credit and deposit growth, urging banks to devise strategies that align with the changing landscape of savings.
In this article, we explore the trends in credit and deposit growth and examine whether there’s a notable shift from traditional saving methods to investments in capital markets and other financial intermediaries.
What and why of Credit-Deposit Ratio?
The Credit Deposit Ratio (CDR) measures how much of a bank’s deposits are being used for lending, which is the core function of banking. A higher ratio shows that a bank is heavily relying on its deposits to fund loans, while a lower ratio suggests less dependency on deposits for lending.
Although regulators don’t set specific limits for this ratio, a higher CDR reflects a bank’s bold approach to lending, where a substantial share of its resources is channelled into loans. This strategy can drive economic growth, but it also raises the stakes, as the bank’s assets become heavily reliant on the repayment of these loans. On the flip side, a lower CDR signals a more cautious strategy, with the bank opting to keep a greater portion of its funds in liquid assets or safer investments. Regulators keep a close eye on CDR to ensure banks strike a careful balance between fuelling growth and managing risk.
Household financial assets as % of GDP lowest since 2018-19
The Reserve Bank of India’s bulletin sheds light on the instrument-wise flow of financial assets and liabilities of households. The data reveals that financial assets as a percentage of GDP rose from 12% in 2018-19 to 15.1% in 2020-21, but subsequently declined to 11.1% in 2021-22 and 10.9% in 2022-23.
When examining the composition of financial assets, the share of cash and deposits decreased from 48.1% in 2018-19 to 45.2% in 2022-23, despite peaking at 53% in 2020-21. The share of investments in mutual funds and equity saw a slight decline from 7.7% to 7.2% during the same period. However, the Public Provident Fund (PPF) share grew significantly from 17.7% to 22.4%, and the share of Life Insurance funds also increased from 17.3% to 18.1%, after reaching a high of 18.5% in 2020-21.
A report by the National Stock Exchange projects that by 2033, the share of cash and deposits will fall further to 41%, while mutual funds and equity are expected to account for 24% of total financial assets, indicating a notable shift towards capital markets.
Credit-Deposit Ratio reached highest in March 2024 in 20 years
The uneven balance in credit growth and deposit growth is of primary concern. Data from the RBI show that the credit-deposit (CD) ratio reached 80% in March 2024, marking its highest level since 2005. In FY 2024, bank credit grew at 19%, rising from 15.7% in FY 2023, whereas the deposits grew by only 13.6%, up from 10.2% in FY 2023. Further, post the pandemic, FY21, there has been a widening gap between the growth of deposit and credit. Deposit growth has lagged behind credit growth, leading to an elevated credit-deposit (CD) ratio. Some also speculate the effect of HDFC Limited’s merger with HDFC Bank in 2023 and the subsequent plunge in share prices behind the higher Credit-Deposit Ratio (CD).
Demat Accounts cross 150 million mark for the first time in FY24
Historically, households have favoured bank deposits as their primary investment vehicle. However, following the pandemic, the proportion of deposits in gross financial savings has declined, as other investment options have started offering better returns. With investors increasingly in search of higher yields and becoming more familiar with diverse investment avenues, the traditional allure of bank deposits is fading, while interest in capital markets is on the rise.
This shift can be attributed to several factors: advances in technology have made it easier for individual investors to engage with capital markets, and the need to combat inflation has driven many to choose these markets for sustainable wealth growth. Consequently, households are increasingly moving their savings from deposits to equities, mutual funds, and small savings schemes, reflecting the broader expansion of the asset management industry. The NSE Report estimates that by 31 March 2024, India had reached 151 million demat accounts, reflecting a strong annual growth rate of 20% since FY13, with a notable surge during and after the COVID-19 pandemic.
Strong growth in Assets Management Industry
The asset management landscape in India is diverse, encompassing Mutual Funds (MF), Portfolio Management Services (PMS), and Alternate Investment Funds (AIF). All these asset classes have experienced robust expansion since FY13.
The Assets under Management (AUM) represent the total market value of all assets—like stocks, bonds, and other securities—managed by a fund on behalf of its investors. AUM fluctuates based on three key factors: inflows, outflows, and market prices. The AUM of Mutual Funds in India grew from 7 trillion Rupees in FY 2013 to 53 trillion Rupees in FY2024. During the same period, the AUM of Portfolio Management Services (PMS) grew from 6 trillion Rupees to 30 trillion Rupees, whereas the AUM of Alternative Investment Funds (AIFs) grew from less than 0.1 Trillion to 4 Trillion.
The AUM of Mutual Funds grew at an average of 21% per year, whereas Portfolio Management Services (PMS) grew at an average of 16%. In contrast, the aggregate deposits grew at an average of 11% during the same period. Such robust growth in different asset classes shows a shift towards capital markets by investors.
Is the shift towards capital markets true?
There has been ongoing debate about whether the rise of capital markets in India is coming at the cost of bank deposit growth, a concern even echoed by the RBI Governor. The reality is complex, and the answer depends on the interpretation of various data points.
A report by Live-Mint suggests that the relationship between bank deposits and mutual funds is not straightforward. When retail investors move funds from savings accounts into investments, deposits often shift into current accounts, and vice versa when investments are redeemed. This means that a decline in bank deposits may not necessarily be tied to the growth of mutual funds, and both are mutually exclusive.
On the other hand, reports by CRISIL and the NSE indicate a growing preference among Indian households for capital markets, suggesting that the trend may be linked to a decreased interest in traditional bank deposits.
While there may be no definitive answer, one thing is clear: household deposits are declining, while capital markets are experiencing robust growth. As India’s economy expands, it is widely believed that the share of financial assets in capital markets will continue to increase.
