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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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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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THE EMERGENCE & WITHDRAWAL OF RETROSPECTIVE TAXATION - Oikantik Sinha

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On 3rd November 2021, the UK-based oil and gas exploration giant Cairn Energy Plc announced that it would drop all its current litigations against the Indian Government. These litigations would have allowed the company to seize the Government of India's assets in various countries such as the UK and France, as settlement of an ongoing tax dispute between the two parties.  The question that now arises is why these litigations were made in the first place and how was the matter resolved. To answer this, we must look back at the Union Budget of 2012, where the provision for retrospective taxation was added via an amendment to the Finance Act. How did retrospective taxation emerge? During the years 2006-07, Cairn Energy had sold a section of its shares in Cairn India Limited via overseas transactions to entities such as Malaysia’s Petronas and the Vedanta Group as part of a reorganization process before its IPO launch. A similar transaction during this period was Vodafone's acquisi...
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