June 11, 2024
3 min read
CW Team
Reserve Bank of India (RBI) Governor Shaktikanta Das has urged banks to reassess their business plans as the continuing disparity between credit and deposit growth rates poses challenges in managing liquidity, repricing and rollover risks. “The continuing disparity between credit and deposit growth rates will require bank boards to reassess their business strategies. Maintaining a prudent balance between assets and liabilities is essential,” Das said in a statement. He also warned non-banking finance companies (NBFCs) and microfinance companies against charging exorbitant interest rates on small loans and clarified that the regulator will monitor unsecured loan book growth and associated risks. As per RBI data for the two weeks ending May 17, 2024, the gap between credit and deposit growth rates stands at 3.1 percentage points (310 basis points). The gap has consistently remained in the range of 3.0-3.5 percentage points despite banks having been aggressive in mobilising deposits for over a year now. The assessment does not include the impact of the merger of HDFC and HDFC Bank, which would widen the gap to 6.2 percentage points (620 basis points). This is the second time since April 2024 that the RBI has expressed concern over the imbalance between deposit and credit growth rates. Banks' credit-deposit ratio (C/D ratio) has been hovering around 80% since September 2023, leading to resource pressure to fund credit demand while complying with regulatory requirements such as maintaining a cash reserve ratio (CRR) of 4.5% and a statutory liquidity ratio (SLR) of 18%. In a media interaction after the policy announcement, RBI Deputy Governor Swaminathan J said, “The ideal C/D ratio cannot be prescribed across the board as it varies depending on the business model, type of bank and risk appetite framework of each bank.” He further highlighted the possibility of liquidity risk, rollover risk or re-pricing risk if the disparity widens further. Regarding interest rates charged by certain microfinance companies and non-banking financial institutions, Das criticised the high interest rates on small loans as usury. He asked the regulated entities to use regulatory freedoms judiciously to ensure fair and transparent pricing of products and services. The RBI continues to engage constructively with such financial institutions to protect the interests of customers and ensure overall financial stability. Further, Das stressed the need for these entities to disclose the various interest rates charged. In November 2023, the RBI expressed concern over the excessive growth in unsecured retail loans and over-reliance of finance companies on bank loans. Recent data indicates that these loans and advances have moderated somewhat. The RBI had increased the risk weightings for unsecured consumer credit and bank credit to NBFCs in November 2023 to pre-empt potential risks in these segments.
