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2014 Ends With the Death of Deposit Growth, Lowest in 20 years!

We bring you yet another outlier from the stable of Capital Mind – we analyze public financial data and bring out insights that hardly anyone else looks at!

There’s a problem in banking. Bank Deposit growth is the lowest in 20 years, and credit growth is nearly at the lowest level in 5 years.


Banks get deposits from various parts of the system. If you give me money, your deposit in your bank goes down, mine goes up. If I buy gold, the jeweller’s deposit goes up, mine goes down. So total deposits in the system don’t come down unless:

  • People take out deposits as cash
  • or, if People buy gold from a bank, or or mutual fund products where the money is invested in call money or such. (money stays within the banking system)



Credit Growth Near Five year Lows Too

The growth of bank credit has fallen too, and hangs around the 10% level, which has only been lower (marginally) in 2009.


If deposit growth and credit growth is low, less money is being created; and this has serious implications for banks.

Inflexion point for Banks

We’ve never had Deposit growth this low, and credit growth equally bad. This means the economy is slowing, in many respects. (But we already knew that)

The biggest implication is for banks. Many banks have high price to book values, and high price to earnings. This was okay when you had credit growth of 18% to 20%, which meant that highly efficient banks could easily grow incomes (and earnings) of 30%+. ‘’

But that kind of monetary expansion has a cost: inflation. And in the process of cutting inflation down to size, the size of the monetary base – both RBI managed “reserve money” and bank-dependant “broad money” have reduced growth to numbers like 10% (from 20% to 30% earlier) With lower money supply growth, credit and deposits will also grow at a slower pace.

Now, with lower credit growth and consequently, anaemic deposit growth, we will find banks struggling to keep their profits intact. Today the RBI protects them by offering sudden repo and reverse repo schemes that afford them good spreads (such that they don’t have to cut rates too much), but eventually their growth has to come from credit and deposit growth.

Will lower interest rates prop up credit? I’ll argue in some detail but interest rates, at least for bank borrowing, is already down, by at least 1%. So at best the RBI signal will help in signalling, but not much else – banks will not cut lending rates easily.

So, Banking profit growth will massively moderate in 2015, and we will see the 10% numbers even in private sector banks. I might be going out on a limb in this case, but the case for banking versus the high expectations in the banking index seems contradictory. Prices often form bubbles, and 2015 will probably tell us how much banks were overvalued this year.


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  • esotericBlue says:

    one word, kudos! thank you for offering high caliber content pro bono.

  • It might (should ) be discounted but seeing the Bank Nifty’s stellar run, it might not.
    If cheap money is not there for Banks, then their margins (NIM) will be in bad shape.

  • Great analysis Deepak. Key question is whether this slowdown in credit growth is only indicative of declining performance for banks or does it have also broader ramifications? Given credit growth was at a a similar level in 2009 which I think is explained by a drop in demand which meant businesses didn’t need money to expand capacity. But this time around, things are very different with a booming US market, low oil prices, low inflation. So what gives?

  • Newbie says:

    Won’t banks profit jump up as a result of fall in interest rates due to the SLR/Bonds they hold ?

  • ramrajpai says:

    this is precisely the point that monetary transmission downwards to bank lending rates is going to be a huge challenge given the economic scenario. repo rate reduction can help a bit but the challenge is banking sector health, and corporate sector health to boot. the only positive is the reduction in inflation and for the first time in many years, depositors may have started getting some real interest for a change which may give some fillip to deposit growth. On the other side though to make life more difficult bond rates have trended down sharply, credit spreads have shrunk, as a result of which corporates have started looking far more seriously at bond markets which are far more efficient in transmitting rate changes : this will put pressure on banking sector advances growth too as banks will struggle to retain a lot of their top ranked corporate customers.

  • Akash says:

    Hi Deepak,
    Appreciate your analysis(as always)! Keep up the good work !

  • Ganesh Nayak says:

    This is scary.. Out of top 10 stocks in my portfolio (Spread across 4 MFs), 6 are bank stocks.. Why are the fund managers so gung ho about banks if the story is so weak?