Indian banks have been facing a significant challenge recently: attracting deposits from customers. This problem has become so severe that experts are calling it the worst deposit crunch in two decades.
So what does this mean for investors and normal people, and why is this number the worst in 20 years?
Indian Bank Deposit Crunch – What Is Deposit Crunch?
Let me break down some important terms for you. When we talk about “Deposit Crunch,” we are referring to the banks that have been struggling to get people to put their money into savings accounts. This deposit is very crucial for banks because they heavily rely on deposits for their operations, like lending money for various purposes like home loans and business investments.
One of the indicators of this struggle is called the credit deposit ratio (CD ratio). The ratio tells us how much of a bank’s deposit is being used to lend out loans. Right now in India, the ratio is at its peak since 2005. It means that banks are lending out more money than they have deposits in hand.
Why People Are Not Putting Their Money In The Bank?
There are a few reasons for this, but one of the main reasons is that people are all seeking higher returns on their investments. As the stock market is performing well and people become more financially savvy, they prefer to choose stocks rather than put their money in a savings account.
To attract more deposits from customers, banks will have to increase the interest rates that they offer to savers. But even with the hike in interest, the bank is still struggling to keep up with the demands of the loan
Some experts believe that as soon as interest rates on deposits and regulations on risky loans tighten, people will start depositing their money in the bank again. This will help balance out the situation and make it easier for banks to lend money responsibly
If this doesn’t resolve soon the stock market will be heavily affected and the index like Bank Nifty can see a huge drop
