Where does a Rs100 bank deposit go?


In all the noise about rising bad loans, a deposit deluge in the aftermath of demonetisation and the collapse of credit growth, it’s time to take stock of where public funds are lying right now in the economy.

Data from the Reserve Bank of India shows that the credit-deposit ratio as of end-May was 72%, which means that out of a Rs100 deposit, Rs72 went towards lending and the rest was used to purchase government bonds. Exactly a year ago, banks had lent Rs76 out of every Rs100 deposit and had parked the rest in bonds. This is as per the stock of deposits on the last day of the month.

It gets interesting when we look at the incremental credit-deposit ratio, which shows how much of the new flow of deposits is getting deployed into credit. And this truly reflects the collapse in credit growth in 2016-17. As of March end, the incremental credit-deposit ratio was 42%, showing that more than half of the deposits that came in were deployed into government bonds. These are low-yielding and safe assets. Again, this is explained by the fact that the deposit deluge following the demonetisation of high-value currency notes left banks with little choice but to buy government bonds as loan demand was low. During the months of demonetisation, this ratio was even lower. For instance, in November, it was 1%, which rose to 13% in December.

Coming back to the 72% credit-deposit ratio as of last month, the biggest share of this is still parked with industry through loans followed by credit to services and individuals. Out of every Rs72 lent, roughly Rs17 went to services and personal loans each, while a little more than Rs28 went to building and running factories. Only Rs10 out of every Rs100 was lent to agriculture. The share of personal loans has risen to around 25% of total non-food credit from 21% a year ago. That of industry has fallen to 38% from 41% while farming retained its share of around 14%. Essentially, around Rs25 of every Rs100 deposited with a bank finds its way back to us in the form of home loans, car loans and other personal credit.

What about the toxic pile of loans that banks are saddled with? Around Rs14 out of every Rs72 lent is now labelled as stressed, which means it either does not generate any income for banks or the borrowers are delaying payments to lenders.

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