Banks on Alert: Advances Outgrowing Deposits in Q1 FY 25 Raises Concerns.
Growth of Advances compared to Deposits is concerning the banking sector in India. It seems Indian people are moving their capital from bank deposits to other Investment Instruments.
Table of contents
- Meaning of Deposits and Advances
- What is the Growth of Deposits and Advances
- Deposits and Advances Growth of Top 5 Banks in Q1 FY 25
- Growth of other Indian Banks
- What could be the reason for lower deposit growth in this Quarter?
- What does lower deposit growth mean for the Banks
- What it means for you as a Banking Customer or Investor
- What did the RBI Governor say on this?
- Summary
- Sources
Meaning of Deposits and Advances.
Meaning of Deposits.
The capital or the money kept in the bank’s Savings account, Current account, or Fixed Deposit account are called the “Deposits”. The money is deposited in a bank account to save money & gain the interest on the money deposited.
Meaning of Advances.
Advances mean the loan/advance given to businesses or people by the banks to gain interest on the amount given. Providing loans and earning interest is the main objective of banks. Advances are the backbone of any bank.
2.0 What is Growth of Deposits & Advances?
Every company works hard to grow their business every day. Growth is necessary for every business or company to run their operations smoothly for long-term business hence for banks, increasing their deposits & advances (Loans) is a necessity.
Indian companies including banks need to declare their results every 3 months (Quarter) and Once a year. Banks display their financial performance every 3 months in which they state their deposits received and advances given by the bank to others. The difference between deposits and advances every 3 months is the growth of deposits & advances.
Deposits & Advances (Loans) growth of India’s Top 5 banks in Q1 Financial year 25.
India’s top 5 banks announced their quarter 1 of financial year 2025 results in July 2024 and the growth of deposits compared to advances was a concerning thing for the banking sector in every company’s result.
The deposit receiving growth by banks is lower than advances given growth by banks in the first quarter of this year. In the table below, we have compared the growth of deposits & the advances on quarter to quarter basis. Take a look at it.
QoQ growth
| Banks | QoQ Deposits growth QoQ | QoQ Advances growth |
|---|---|---|
| HDFC Bank | -14.41% | -0.86% |
| ICICI Bank | 0.94% | 3.27% |
| SBI | -0.29% | 1.22% |
| Axis Bank | -0.58% | 1.56% |
| Kotak Mahindra Bank | -0.34% | 3.69% |
The Table above proves that 4 out of India’s top 5 banks have reported fewer deposit numbers compared to the March 2024 Quarter (4th Quarter of FY 24). The Banks have given advances to more customers than the number of customers have deposited in the bank accounts in the last 3 months.
The Quarter advance growth is reduced and Advance numbers grew but what does the Year-on-year growth suggest?
YoY growth
Comparing this year’s financial quarter to last financial year’s quarter is called Year on Year comparison. So, How’s the deposits & Advances growth YoY?
| Banks | YoY Deposits growth YoY | YoY Advances growth |
|---|---|---|
| HDFC Bank | 24.36% | 52.48% |
| ICICI Bank | 15.23% | 15.66% |
| SBI | 8.18% | 15.89% |
| Axis Bank | 12.83% | 14.16% |
| Kotak Mahindra Bank | 15.84% | 18.68% |
The ICICI Bank is the only bank that maintains a good balance between Deposits & Advances. If we compare the Top 5 banks’ deposits growth & Advances growth year-on-year basis. It is clear that the Bank’s Deposit growth is lower than the Advances growth.
All the top 5 banks of India have lower deposit growth compared to Advances (loans) growth.
How are the QoQ deposits & advances the growth of other Indian banks?
| Banks | QoQ Deposits growth QoQ | Q Advances growth |
|---|---|---|
| Bank of Baroda | -1.50% | -1.67% |
| Indusind Bank | 3.62% | 1.34% |
| Union Bank | 0.22% | 0.91% |
| Yes Bank | -0.50% | 90% |
| Bandhan Bank | -1.50% | 0.70% |
The Banks other than the top 5 are also struggling to keep their Advances growth lower than the Deposits growth. Almost every Bank in India is having difficulties in growing their deposit numbers. If the deposits fail to grow then the banks have to face financial difficulties.
What could be the reason for lower deposit growth in this quarter?
5.1 Slower economic growth :
The world has been going through slower economic growth recently. this could create a doubtful financial future in the people’s mind. People usually like to keep their money safe and slower economic growth may not be the best option for some people in this weak economy time.
5.2 Lower Interest rates :
Who does not like to receive more? why would you invest or save your money where interest rate is low? This may be the thinking of many Indians recently. Indian banking customers are receiving lower interest on their investments & savings compared to other investment instruments. The lower interest rates are one of the biggest reasons for customers switching their capital from savings accounts to other investment instruments.
5.3 Different Investment Options :
We have seen recently Indians are investing more in Mutual Funds rather than saving their money in bank accounts. Mutual Funds are giving higher returns than the banking deposits interest rates. The lower interest rates are one of the biggest reasons for customers switching their capital from savings accounts to Mutual Funds Schemes.
What does it mean for Banks?
Receiving deposits & providing loans to customers is the main objective of banks. Banks take deposits from customers and provide loans to other customers to gain profits. but what will happen if banks receive fewer deposits?
6.1 Funding Issues
If Banks receive lower deposit growth than advances then Banks have to find other sources such as issuing bonds to meet their obligations of Withdrawal demands.
6.2 Liquidity Issues may arise
Banks provide loans to other customers by taking deposits from their customers but if banks stop receiving deposits from their customers then they will fail to provide loans to businesses and to other customers. Bank needs deposits to run their operations successfully.
6.3 Compromise in Profitability
Customers are the backbone of every business, if there are no customers then businesses are likely to break down. So, To attract customers, Banks may start to give more interest on savings accounts, and fixed deposit accounts but to do that they need to compromise on their profit margins.
What does it mean for you as a banking customer or investor?
7.1 Banks may rise Interest rate to attract deposits.
Lower interest rates compared to other investing instruments are the reason why banks are receiving fewer deposits. Hence, Banks may try to attract customers by increasing the interest rates on savings accounts and fixed deposit accounts. Banks may start to get more deposits if the interest rates get attractive in the coming time.
7.2 Higher Interest Rate on Loans/Advances.
Banks need to keep their profit margins in order to stay profitable. If the Deposit growth is less then banks may increase interest rates on loans provided to businesses or for personal use. The increase in interest rate on loans will affect the banking customers.
7.3 Investors may not trust the Banking sector in the coming time.
Investors like the sector that will be profitable in the future but if the deposits grow at this rate in the banking sector then it may create doubts in investor’s minds. Lower deposit growth means lower profits in the future or compromises with profitability margins.
If the banking sector is less trustworthy for investors then the banking stocks will be affected. The banking stock prices may fluctuate in the coming time.
8.0 What did the RBI governor say on this concern?
The article which was written on www.deccanherald.com on 20 July told about the RBI governor’s concern over the gap of growth between deposits & advances.
In the article the RBI Governor has said “While there could be a debate regarding ‘deposits funding loans’ ‘loans funding deposits’, the current regulatory concern stems from the fact that there could be structural changes happening which banks need to recognize and, accordingly, devise their strategies,”.
9.0 Conclusion
- Deposits means the sum of money that people have kept in their savings accounts and fixed deposit accounts.
- Advances means the Loans provided by banks to businesses and other customers for personal use.
- Bank’s deposit growth is lower than advance growth in recent times.
- Indian People are moving their capital from bank accounts to other investing instruments.
- Banks may need to attract deposits by increasing interest rates on deposits.
- Or banks may increase interest rates on loans to keep up with profitability.
- Banking stock prices may fluctuate in the coming time.
- Investors may not be interested in investing their capital in the banking sector if the growth of deposits continues at this rate.
- The RBI Governor & Financial Minister of India are also getting worried about this situation.
Nice information