High loan deposit ratio of banks not a worry: Motilal Oswal research

India’s banking system has a high loan deposit (LD) ratio of 77.2 per cent as of August 9, but there is no reason to worry, a research note from Motilal Oswal Financial Services stated on Wednesday.

Despite the ratio, recorded at a rate higher than 77 per cent for the 10th consecutive month, there is no rigidity in the Indian banking sector, the note pointed out. An average Liquidity Adjustment Facility (LAF) deficit that is just 0.3 per cent of the net demand bears evidence to the fact.

The research said its “analysis suggests that deposit growth could be raised by either making other asset classes unattractive (through taxation and/or interest rate) or increasing the growth in net credit to the government by pushing fiscal spending higher”.

So far, the RBI and banking sector’s net credit to the government since January this year has seen single-digit growth.

The research note contradicts reports that the banking sector’s deposit growth has been slow in recent months, saying that deposits registered an increase of 10.4 per cent in the period from March 2020 to August 2024, compared to a rate of 9.5 per cent between January 2015 and February 2020. Overall, the average growth in the past decade, from January 2015 to August 2024, has been 9.9 per cent.

Loan deposit ratio of the Indian banking system scaled a high of 78.8 per cent in September 2013, and then reached 78.2 per cent in March this year.

The observations of the research note are in sync with latest Reserve Bank of India (RBI) data that shows bank deposits surged 10.8 per cent as recorded on August 9, 2024, on a year on year basis.

Meanwhile, the RBI and the finance ministry have asked banks to introduce new methods to attract larger deposits from customers.

“Policymakers can also attempt to encourage savers to shift their investments from other asset classes to bank deposits. However, this may require significant effort from regulators and carries the risk of overreach. Further, such measures could undermine general confidence, potentially hindering economic growth. Overall, nearly all policies aimed at reducing the LD ratio could ultimately harm domestic economic growth,” the report said.