Declining bank deposits raise concerns about NBFC's fund raising capacity: CareEdge

Amid the concerns of declining deposits at banks, CareEdge Ratings anticipated that the credit-deposit ratios may pose a concern to the Non-Banking Financial Companies (NBFCs).
"Bank's credit-deposit ratios raise concerns about NBFCs' ability to secure funds," it said.

By definition, the credit-deposit ratio (CD ratio) is a tool that measures how much of a bank's deposits are lent out as loans.

The report by the rating agency added that enhanced regulatory supervision will lead to higher compliance costs. However, emphasising the need to have greater supervision, it noted its importance for the stability of the sector.

"There is a growing discussion on the need to monitor the end-use of funds by NBFC. Additionally, smaller NBFCs and smaller fintechs are facing challenges on the liability side, underscoring the need for strategic solutions to address these challenges," CarEdge said in the report.

Recently, a report by the State Bank of India (SBI) highlighted the continuous upward trend in credit growth in Indian banks, which is outpacing the growth of deposits.

SBI report states "Latest fortnightly credit and deposit growth number shows credit growth continues to outpace deposit, though moderated from last year growth of 16.2 per cent (June'23 YoY)."

Specifically, for the fortnight ending July 12, 2024, the report noted that the credit growth for All Scheduled Commercial Banks stood at 14 per cent on a year-on-year basis, while deposit growth was reported at 11.3 per cent.

This trend persists even as Indian households have substantially increased their investments in mutual funds and equities.

On August 10, Union Finance Minister Nirmala Sitharaman again asked the banks to focus on their core business and come up with innovative products to increase deposits.

Addressing a press conference following a customary post-budget meeting with the Central Board of Directors of the Reserve Bank of India (RBI), the Finance Minister stated, "The Reserve Bank and the Government are repeatedly telling the banks to pay attention to their core business activities."

She further said that she would raise the issue with the banks again.

Supporting the remarks of the minister, the RBI governor Shaktikanta Das also expressed his concern on the issue and said the central bank has alerted banks on the issue several times, and lastly in the previous policy on 8th August as well. NBFCs play a crucial role in the financial ecosystem, growing at a Compound annual growth rate (CAGR) of 14 per cent.

Amongst banks, NBFC and AIFIs (All India Financial Institutions), NBFCs have maintained 21-24 per cent share of credit from FY17 to FY24, as per the report.

According to the report, the banks account for approximately 70 per cent and AIFIs make up the remaining 5-7 per cent.

The rating agency further anticipated that the NBFC sector is likely to grow by 17 per cent in FY 2025.