Understanding The Gap Between Bank Deposits And Loan Growth: What It Means For Your Finances

The recent unstarred question in the Rajya Sabha (No. 892) sheds light on a key aspect of India’s banking sector: the relationship between deposit growth and loan growth, according to a recent circular issued by the Ministry of Finance.

The Current Scenario

From June 2020 to June 2024, bank deposits grew faster than advances by Rs 5.68 lakh crore. However, on a quarterly basis, loan growth outpaced deposit growth in seven out of 16 quarters. This dynamic is prompting banks to explore innovative ways to mobilize funds to meet growing credit demand.

Key Challenges For Banks

Lagging Deposit Growth: Although deposits grew significantly, their growth did not consistently match the pace of loan advances.

Increased Reliance On Market Borrowings: Banks are turning to higher-cost instruments like green bonds, infrastructure bonds, and inter-bank borrowings to meet funding requirements.

Inactive Bank Accounts: Despite the rise in the number of accounts, many remain inactive, presenting another challenge in deposit mobilization.

Steps Banks Are Taking To Address the Gap

• To attract more deposits and improve account activity, banks have adopted the following strategies:

• Expanding Branch Networks: Especially in micro-markets within urban and semi-urban regions.

• Targeting Specific Customer Segments: Customizing products like external benchmark-linked deposits and corporate salary accounts.

• Campaigns And Data Analytics: Leveraging customer data to design innovative deposit products.

• Digital Platforms: Promoting efficiency by focusing on digital banking, which lowers transaction costs.

• Activation Of Dormant Accounts: Banks are using SMS, calls, and outreach via banking correspondents to re-engage with inactive account holders.

What It Means for You

For Savers

Competitive Deposit Rates: Banks are offering higher interest rates and innovative deposit schemes to attract savers. Look out for products that meet your financial goals, such as deposits linked to external benchmarks or those with flexible tenures.

Enhanced Digital Banking: With a push toward digitalization, managing your accounts online has never been easier. Use these tools to keep your accounts active and avoid dormancy.

For Borrowers

Cost Of Credit: If banks rely more on higher-cost borrowings, this could lead to slightly higher interest rates for loans. It's crucial to compare rates and plan your borrowing carefully.

Availability Of Loans: A diversified approach to fund mobilization ensures a steady supply of credit, but you may notice stricter lending criteria as banks manage risks.

For Dormant Account Holders

Reactivation Opportunities: If you’ve neglected an account, banks are actively reaching out to help you reactivate it. Respond to SMS or calls from your bank and explore how to utilize the account effectively.

Avoid Dormancy Charges: Keep track of your accounts to avoid penalties or reduced privileges.

Looking Ahead

The Ministry of Finance’s data highlights the need for a balanced growth strategy between deposits and advances. As a depositor or borrower, understanding these dynamics helps you make informed decisions. Keep an eye on the innovative offerings from banks and leverage them to maximize the value of your financial resources.