Incremental credit-deposit (CD) ratio in the banking system has moderated to 77.7% for the fortnight ending October 18, the lowest in nearly 30 months, underscoring a sharp deceleration in systemic credit growth. The latest data reveals that credit growth year-on-year slowed to 11.5%, down from 12.8% in the previous fortnight, marking a notable downshift in lending activity.
In contrast, systemic deposit growth remained steady at 11.7% YoY, only slightly below the previous fortnight’s rate of 11.8%. Fiscal year-to-date, outstanding credit has risen by 4.9% since April, while outstanding deposits have grown at a faster pace of 6.5%, driving the overall loan-to-deposit ratio (LDR) down to 79% from 80.3% at the start of the fiscal year.
Contrasting trend
The declining LDR across the system masks a contrasting trend among public sector banks, where LDRs continue to rise, reflecting a quicker correction in the skewed CD ratio compared to private banks. Analysts suggest that the shift in the CD ratio is being influenced by slower demand for unsecured loans and an elevated LDR environment, factors that may continue to weigh on credit growth.
Initially it was projected FY25 credit growth would reach 12.5%, with expectations that the gap between credit and deposit growth would narrow to less than 100 basis points. However, with the recent weakness in the credit environment, particularly in unsecured lending, analysts now see a downside risk to this estimate, forecasting potential credit growth closer to 10.5% for the fiscal year.
In Q2, SCBs reported a deceleration in credit growth, which increased by 9.5% year-over-year in Q2FY25, compared to 26.9% last quarter. This slower growth stemmed from normalisation post-merger activities and a moderation in commercial lending. Deposit growth, on the other hand, rose by 11.8% year-over-year, surpassing credit growth. Time Deposits saw a robust 17.2% increase as attractive deposit rates drew customers away from CASA accounts, contributing to a decline in the CASA ratio to 37.4%. As a result, the Credit-Deposit (C/D) ratio fell by approximately 182 basis points, reaching 85.4% as of September 30, 2024.
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