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Balancing Act: Addressing India's Growing Credit-Deposit Gap and Its Financial Implications - Vansh Aggarwal

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  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-...
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GENDER PARITY IN FINANCIAL INCLUSION IN INDIA - Shivanshi Garg

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It must be very well known to you all that in India, house helps generally prefer to take payment in cash. And even if asked to get their salary transferred into their bank account, they provide their husband’s or son’s bank account because they are the ones who use and operate smartphones and have payment apps in their family. This anecdote clearly shows the gender divide prevalent in financial choices and behavior. And it will not at all be surprising for you to hear that the relevant statistics tell a similar story. As per a recent survey, only 77% of women in India have access to formal financial services while the rest of 23% don’t. And out of that 77% who have access, only 35% are non-dormant on their respective accounts. The remaining 42% of accounts are dormant i.e., they have had no transaction in the last year. Reasons: The first and foremost reason for this gender disparity is the low female labor force participation rate. This rate is under 20% and has fallen to almos...
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RBI's Stealth Hike: Borrowing Gets Costlier Without Rate Twists - Hemank Purohit

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RBI hiked interest rates in a new fashion this time. Some refreshers: Banks are the bridge between people who have excess money and people who are need of one. A bank typically takes deposits from customers and lends them to the borrowers. But a bank can’t just play around with other people’s money. It has to have some skin in the game to be trusted, right? So, as mandated by RBI, each bank has to set aside some percentage of its own money or capital for each penny they lend. This is to make sure there remains an ownership and it’s not just depositors’ hard-earned rupees that’s at stake. And here comes the concept of “Capital Adequacy Ratio” CAR as bankers normally say. Let’s say that percentage is 10, which means for ₹100 bank lends they need to have atleast a ₹10 capital coverage. Now here is where it gets interesting, each loan has a different risk factor. For instance, if the bank gives out a home loan, it can always repossess the home if there’s a default. There is a col...
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