While banks do not typically rely on deposits alone to provide loans — the mechanics of credit creation work differently from textbook definitions — a strong deposit base provides a cushion to banks.
Author
Deepanshu Mohan, Professor of Economics and Director, Centre for New Economics Studies, O.P. Jindal Global University, Sonipat, Haryana, India.
Summary
Recent data suggests a worrying macroeconomic reality for India’s already fragile financial sector, which is weighed down by non-performing assets (NPAs), debt, and insolvency issues: deposit growth is lagging behind credit growth rate. In June, bank deposits grew at less than 11%, while bank loans rose by around 14%. By August 9, bank deposits had shown a yearly growth of 11.7%, whereas bank loans had grown 18.4%.
In short, the demand for credit is significantly outpacing deposit growth in banks. In such a situation, banks, especially public sector banks, may face liquidity issues and challenges in meeting withdrawal demands due to the insufficient deposits.
Furthermore, rapid loan growth increases the risk of defaults, which could escalate NPAs and strain the banking sector’s stability.
Published in: Deccan Head
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