Banks may face liquidity crunch as loans outpace deposits

Banks are likely to be hit by a liquidity crunch going ahead as the growth in loans has outpaced deposits growth, say analysts. This lag in deposit growth comes at a time when the Reserve Bank of India (RBI) has been removing surplus liquidity from the system in a bid to fight inflation. 

“Banks had run up their cash reserves and money available at short notice in the last one-two years. They have used some of that money to fund their asset growth. The excess statutory liquidity-qualifying securities that they were running have come down. Especially, small and mid-sized banks have ramped up their repo borrowings,” Jindal Haria, financial institutions director, India Ratings and Research, said. “Going ahead, banks may have to continue to raise their deposit rates much more and rely more on the wholesale side. So, liquidity for banks will be somewhat tighter.” 

To put things in perspective, bank loans rose 17.9% on year to ₹128.9 trillion as on October 21, the latest fortnightly data from the RBI showed. This is the highest year-on-year growth in advances in around nine years. On the other hand, deposits lagged behind, rising 9.5% on year to ₹172 trillion. 

The sharp growth in loans has been due to demand for retail credit and increase in working capital demand among corporates, credit rating agency CareEdge said in a report dated October 22. The report showed the credit-to-deposit ratio rose by 525 basis points on year to 74.5% for the fortnight ended October 7.