Fresh data from the Reserve Bank of India (RBI) has highlighted a growing structural concern in the banking system: credit growth is racing far ahead of deposit accumulation. The gap widened significantly in the first half of December, largely driven by outflows for tax payments, putting pressure on banks' liquidity management.
Deposits Contract as Credit Expands
According to the latest fortnightly data from the central bank, scheduled commercial banks witnessed a contraction in total deposits during the fortnight ended December 15. While deposits, excluding inter-bank balances, showed a year-on-year growth of 9.4% to reach Rs 246.4 lakh crore, they fell sharply by nearly Rs 1.7 lakh crore compared to the previous fortnight ended November 28.
The decline was seen across both major categories. Demand deposits, despite an annual growth of 11.8%, contracted by Rs 94,677 crore in the fortnight. Similarly, time deposits, which grew 9.1% year-on-year, declined by Rs 71,782 crore.
Strong Credit Offtake Widens the Gap
In stark contrast, bank credit growth remained robust. Loans extended by banks expanded by 11.9% year-on-year to Rs 201.8 lakh crore as of December 15. This meant credit growth was outpacing deposit growth by approximately 250 basis points.
Even as deposits shrank in the latest fortnight, banks managed to extend fresh credit worth Rs 1.1 lakh crore. This active lending sharply widened the credit-deposit wedge, highlighting a core funding mismatch.
Banks Turn to Alternative Liquidity Sources
To bridge this growing gap, banks appear to have leaned heavily on alternative sources of funds. Borrowings from the RBI saw a massive jump, soaring from Rs 2,144 crore to Rs 26,568 crore over the fortnight.
Simultaneously, banks seem to have liquidated parts of their investment portfolios to fund the credit demand. Banks' investment portfolios grew only 5.1% year-on-year and fell by Rs 16,713 crore in the latest fortnight. This suggests a sell-off of government and other approved securities to generate liquidity in the absence of fresh deposit inflows.
Banking experts note that while a scenario where credit runs ahead of deposits is often self-correcting—as money lent out typically returns to the system as a deposit—structural factors can disrupt this cycle. For instance, if banks quickly securitise and sell the loans they originate, the associated deposits move off their balance sheets, limiting net deposit growth for the banking system as a whole.
Similarly, when loans are funded through borrowing from the central bank or wholesale markets, credit expands without a commensurate rise in retail customer deposits. The liability growth in such cases accrues to wholesale funding sources rather than strengthening the traditional deposit base, creating a persistent imbalance.
