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Informist, Friday, Jan. 31, 2025

MUMBAI – Despite the long-term stability of the Indian banking system being safeguarded, a mismatch between credit and deposit growth rates and stress on unsecured credit remain areas of concern for banks, according to the Economic Survey for 2024-25 (Apr-Mar), tabled by Finance Minister Nirmala Sitharaman in Parliament on Friday. 

The survey said that the period of mismatch between credit and deposit growth is usually around 41 months, but the merger of a bank with a non-bank had elongated the cycle in this episode. HDFC Ltd had merged with HDFC Bank on Jul. 1, 2023.

"The analysis reveals that credit growth precedes deposit growth and that convergence is usually achieved through a fall in credit growth," the survey said. 

It also cited another area of concern within the banking system – the stress on unsecured credit, namely personal loans and credit cards. According to the Reserve Bank of India's Financial Stability Report, 51.9% of the fresh addition to bad loans in the retail loan portfolio emanated from slippages in the unsecured loan book, as of Sept. 30. 

"When a borrower defaults on any loan category, financial institutions classify all loans of that borrower as non-performing. Hence, their larger, secured loans face delinquency risks due to defaults in smaller personal loans," the report said. 

The survey also spoke about the risks of using artificial intelligence in banking. "The black-box nature of AI systems can make it difficult to assess the system's reliability or contest its decisions. This lack of transparency can lead to trust concerns and challenges in validating the fairness and accuracy of AI decisions, making it challenging to audit or interpret the algorithms that drive the decisions," it said. 

Without an appropriate governance framework, AI systems might operate without clear guidelines or oversight, leading to potential abuse or misuse of technology, it said.  End

Reported by Kabir Sharma

Edited by Avishek Dutta

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