Deposits won’t grow faster; it is time for credit growth to slow down

livemint.com:

₹4 trillion, the RBI conducted repo auctions to inject system liquidity. Irrespective of external flows or government spending, deposit accretion levels are largely a consequence of the monetary policy stance and resultant liquidity actions. What is in banks’ control, however, is the composition of deposits between Casa (current account and savings account) deposits, retail term deposits and bulk deposits.

This mix is largely driven by the prevalent interest rates in the system, and as deposit rates have spiked, retail term and bulk deposits have seen their share increase with Casa growth being anaemic. But as banks went out on a limb to raise deposits with multiple schemes, the goal posts shifted again. To minimize individual bank liquidity risk and maintain healthy balance sheets, the regulator advised caution on the reliance on bulk deposits to bolster deposit growth.

It has also mooted a new liquidity coverage ratio framework which will force banks to raise more granular deposits. Looking at the monetary stance and the regulator’s liquidity actions, one needs to be reconciled with deposit growth continuing around current levels, irrespective of what officials say. It also shows that there is only one way the system is headed—credit growth needs to slow down in line with the deposit growth calibrated by RBI.

When it comes to credit, regulatory actions have been a lot more emphatic. Over the last 18 months, the RBI has been vocal about credit excesses in specific segments and products such as gold loans and loans against shares wherein cease-and-desist orders have been issued to specific non-banking financial companies (NBFCs). It acted forcefully by increasing risk weights for certain products such as unsecured