RBI's Response to Loan and Deposit Disparity

The episode highlights the growing gap between loan and deposit growth rates in India's banking sector, emphasizing that as of 2022, banks were lending out 130 rupees for every 100 rupees collected as deposits. This alarming trend arose post-COVID when interest rates were lowered to stimulate borrowing, leading to unexpected increases in loan uptake even as interest rates rose. The Reserve Bank of India (RBI) responded by employing measures such as moral suasion to encourage banks to attract more deposits, increasing risk weightings on certain loans to make them pricier, and imposing stricter liquidity coverage ratio norms. These strategies have since started to yield results, with credit growth cooling and deposit growth beginning to outpace loans, indicating a stabilization in the financial system.