Indian Banks Increase Short-Term Borrowing Amid Rising Loan Demand and Weak Deposit Growth

Indian banks are increasingly relying on short-term debt to fund loan growth, as loan expansion (17.4%) outpaces deposit growth (11%). The outstanding amount of certificates of deposit (CDs) reached a 12-year high, amidst strong loan demand and dwindling deposits. RBI Governor Shaktikanta Das warned that this strategy may heighten banks' sensitivity to interest rate changes and impact liquidity management. Banks are exploring alternatives, like selling loan portfolios and raising funds from the bond market, to bridge the credit-deposit gap.

Indian banks have been grappling with a credit-deposit gap, leading to an increased reliance on short-term debt to fund loan growth[1]. With loan expansion outpacing deposit growth by a significant margin[1], banks have been turning to certificates of deposit (CDs) to bridge the gap[2]. This strategy, however, comes with its own set of risks, as the outstanding amount of CDs has reached a 12-year high[2].

The Indian banking sector is undergoing a transformation, with traditional rivals facing stiff competition from digital banks, fintechs, bigtechs, and private capital[1]. This competition is particularly intense in the deposit market, where banks are competing with digital banks offering higher deposit costs[1]. In response, banks have been relying heavily on short-term debt to fund loan growth[2].

However, this strategy may heighten banks' sensitivity to interest rate changes and impact their liquidity management[2]. RBI Governor Shaktikanta Das has warned banks against relying excessively on short-term debt, emphasizing the need for alternative funding sources[2]. Banks are exploring these alternatives, including selling loan portfolios and raising funds from the bond market[2].

The rise of digital wallets, account-to-account payments, and buy now, pay later (BNPL) options in India has disrupted traditional payment channels, further pressuring banks to adapt[1]. Banks are responding by focusing on specialized services, collaborating with fintechs and bigtechs, and exploring strategic partnerships with franchised brands in technology and other nonfinancial industries[1].

Despite the challenges, retail customers remain the backbone of the Indian banking sector. They are demanding a superior digital-first experience without compromising personalized service[1]. Information is also becoming democratized, with technology and social media empowering customers like never before[1]. Banks must heed these new demands and continue to adapt to remain competitive in an increasingly crowded marketplace.

[1] Deloitte. (2022). Banking Industry Outlook. Retrieved from https://www2.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks/banking-industry-outlook.html

[2] Reserve Bank of India. (2022). Statement on Developmental and Regulatory Issues. Retrieved from https://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy