Deposit Crunch:
Banks are currently experiencing a deposit crunch, which is limiting their ability to extend credit.
- The Reserve Bank of India Governor Shaktikanta Das had, in July, raised concerns over slower deposit mobilisation compared to credit growth stating that as it may create structural liquidity issues.
- India is among the fastest-growing large economies of the world largely driven by the government’s elevated expenditure on infrastructure development.
- While government capital expenditure has spurred the growth rate, job creation remains a concern with youth unemployment touching 17 per cent, as highlighted by the World Bank.
- Private investment, measured by private Gross Fixed Capital Formation (GFCF), has been subdued, declining to a four-quarter low of 6.46 per cent in Q4FY24, down from 9.7 per cent in the previous quarter.
- The Economic Survey 2023-2024 also highlighted that between FY19 and FY23, the share of private non-financial corporations in overall GFCF increased only by 0.8 percentage points from 34.1 per cent to 34.9 per cent.
- In a worrying trend, S&P Global forecasted that year-on-year credit growth is set to decline during the current financial year to 14 per cent, compared to 16 per cent in the previous fiscal year.
- One key reason for this is the reduced risk appetite from banks for lending to the private sector, which is the economy’s largest job creator.
- S&P Global also said that “regulatory actions to tame unsecured lending” are also slowing credit growth. The RBI recently increased risk weights for unsecured loans which has moderated loan growth in this segment in recent months.
