Balancing Act: Addressing India's Growing Credit-Deposit Gap and Its Financial Implications - Vansh Aggarwal
Balancing Act: Addressing India's Growing Credit-Deposit Gap and Its Financial Implications The growing disparity between credit and deposit growth in India's banking sector is indeed a significant issue with potential implications for liquidity, financial stability, and the broader economy. This divergence—where credit growth has outpaced deposit growth—can be traced to several interconnected economic, regulatory, and behavioural factors, and understanding them is key to addressing the potential risks posed by this trend. 1. Money Creation Process and the Expected Correlation In theory, when a bank extends a loan, it simultaneously creates a deposit, since the borrower’s account is credited with the loan amount. This is how the banking system expands the money supply. However, the current situation in India reflects a break in this expected relationship, as the loan growth exceeds deposit growth. As of October 2024, bank loan growth in India stood at 12.8% year-over-...