Credit-Deposit Ratios Prompt Concerns for NBFCs Amid Rising Credit Growth in Banks

CareEdge Ratings warns that declining bank deposits and rising credit-deposit ratios could impact NBFCs' funding abilities. Regulatory supervision and strategic solutions are vital. Simultaneously, Indian banks witness sustained credit growth outpacing deposits, prompting government and RBI to urge banks to innovate and focus on core activities.

In light of declining bank deposits, CareEdge Ratings has flagged the rising credit-deposit ratios as a potential issue for Non-Banking Financial Companies (NBFCs). The ratings agency highlighted concerns over NBFCs' ability to secure necessary funds due to these ratios. 'Bank's credit-deposit ratios raise concerns about NBFCs' ability to secure funds,' the report stated.

The credit-deposit ratio (CD ratio) measures the proportion of a bank's deposits that are lent out as loans. CareEdge's report also pointed out that increased regulatory supervision could lead to higher compliance costs but stressed this is crucial for sector stability.

'There is heightened debate on monitoring NBFCs' end-use of funds. Smaller NBFCs and fintechs face liability issues, necessitating strategic solutions,' CareEdge's report added. The State Bank of India's (SBI) recent report also showed an ongoing trend of credit growth outpacing deposits in Indian banks.

SBI's data indicated that for the fortnight ending July 12, 2024, the credit growth for All Scheduled Commercial Banks stood at 14% year-on-year, while deposit growth was reported at 11.3%. This comes as Indian households increased their investments in mutual funds and equities.

Union Finance Minister Nirmala Sitharaman, following a post-budget meeting with the Central Board of Directors of the Reserve Bank of India (RBI), urged banks to focus on core business activities and innovate to boost deposits. 'The Reserve Bank and the Government are repeatedly telling the banks to pay attention to their core business activities,' she stated.

RBI Governor Shaktikanta Das echoed these concerns, emphasizing that the central bank has consistently alerted banks about the issue. NBFCs, growing at a Compound Annual Growth Rate (CAGR) of 14%, remain vital to the financial ecosystem. The report noted that NBFCs maintained a 21-24% share of credit from FY17 to FY24.

Banks accounted for around 70% of the market share, while All India Financial Institutions (AIFIs) made up 5-7%. The rating agency anticipates the NBFC sector will grow by 17% in FY 2025.

(With inputs from agencies.)