RBI Clarifies Credit Creation, Banks to Operate Sunday Amid Strike Preparations

₹2.49 lakh crore left bank deposits in a fortnight. That is an awkward number to place beside reports of companies rushing to borrow because banks have money to spare. Yet both appear in the week’s published accounts of Indian banking. The tension is not necessarily a contradiction. Money can be plentiful across the system while individual banks face pressure to replace departing deposits. What matters is whether lenders price their next loan for the money available today or for the cost of keeping it funded tomorrow.

That is why the RBI’s warning against a loan price war deserves more attention than a routine instruction to lend carefully. The regulator has cautioned banks against aggressive pricing, particularly when liquidity—the cash available to meet payments and make loans—is abundant. Its concern is that the pressure to earn a return on deposits can encourage lending that deteriorates into bad loans a few years later. A bank can solve this quarter’s problem of unused money by creating a much less pleasant problem for a future quarter. The interest income arrives first; the reckoning takes its time.

There is an immediate commercial temptation. Reliance Industries plans to raise ₹10,000 crore next week through a ten-year bond, a debt security through which investors lend money to a company. Other large companies, including Adani Airport Holdings, are also seeking funds. The reported rush comes ahead of the RBI’s monetary policy decision in early October, as companies seek to lock in favourable borrowing conditions. For a bank with funds waiting to be deployed, such demand offers an obvious outlet. Leaving money idle does not pay the interest promised to depositors.

But a ten-year borrowing requirement and a temporary abundance of cash are different things. The supplied report itself flags the possible difficulty of financing longer commitments with short-term money. That is an asset-liability mismatch: money lent out comes back on a different schedule from money owed to depositors. Think of agreeing to a long lease with income from a temporary assignment. It can work, but the next source of income is part of the decision, not an administrative detail to be sorted out later. This is a question about funding discipline, not a judgment on Reliance’s proposed borrowing.

The deposit figures make that distinction harder to ignore. During the fortnight ending September 15, outstanding deposits fell by ₹2.49 lakh crore, largely because high-cost bulk deposits—large deposits generally placed by institutions or wealthy individuals—matured. Outstanding advances, another name for bank loans, also contracted. Deposit growth slowed to 17.3%, while credit growth, the increase in bank lending, slowed to 18.1%. These figures do not establish a system-wide shortage of money. They do show why a comfortable funding position at one date cannot simply be projected forward.

Nor should the departure of expensive deposits automatically be read as bad news. If a bank does not need to replace all that money, letting it mature could reduce its interest bill. If it has lending commitments to support, however, replacement funding becomes a live pricing problem. The same deposit movement can therefore mean different things for different banks. An industry total is useful context, but it cannot tell a lending team what its own next rupee will cost. That distinction gets lost rather easily when competitors are advertising attractive loan rates.

A separate report sharpens the concern: bank credit growth has reached an eight-quarter high, with deposits lagging and the funding gap widening. Increased lending to the finance sector, particularly non-banking financial companies (NBFCs)—businesses that provide loans and other financial services without being banks—is a major driver. Public sector banks are reported to have stronger lending growth but less capital headroom, meaning less room in their financial cushion to support further expansion. That report and the fortnightly contraction are not interchangeable snapshots. Together, they warn against treating a brief easing in cash pressure as proof that longer-term funding needs have disappeared.

This is where the RBI’s price-war warning becomes a practical business test. A loan rate has to cover more than the cost of funds sitting unused today. It must leave room for the possibility that replacing deposits becomes dearer and that some borrowers fail to repay. Cutting the rate can win business immediately; recovering the lost protection later is less straightforward. The regulator is not announcing that today’s loans have already gone bad. It is warning that competition driven by the urge to put deposits to work can weaken the judgment that keeps them sound.

The competition for deposits is also about to become more visible. The RBI has instructed banks to disclose bulk deposit rates from October 1, although they may receive a grace period. The reported reason for possible additional time is to avoid giving rivals an immediate advantage from reacting to published rates. Greater transparency should give large depositors better information. For banks, it makes the relationship between what they pay for money and what they charge borrowers harder to discuss as two separate subjects. A cheaper loan is not much of a victory if the deposits supporting it must be repeatedly bought at a higher price.

None of this argues for banks to stop competing or for companies to avoid attractive borrowing opportunities. Reliance and other issuers have reason to seek favourable funding, just as depositors have reason to compare returns. The bank’s job is to connect those interests without assuming that current conditions will last for the life of the loan. The strongest response to the RBI’s warning would not be a blanket retreat from lending. It would be a willingness to distinguish business that remains worthwhile under less comfortable funding conditions from business that looks good only while cash is plentiful.