Deposit per se may not be a binding constraint for credit creation: RBI bulletin

RBI economists state that deposits are generated primarily through bank lending, investments, and foreign capital inflows
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Per se, deposits might not act as a limiting factor for credit creation, since every credit naturally generates an equivalent deposit, stated RBI officials in the central bank’s recent monthly bulletin.

Therefore, a bank does not strictly need to accumulate liabilities like deposits prior to creating credit.

“The banking system extends credit and generates deposits simultaneously. The core tenet of this literature is that banks do not need to secure funds beforehand for credit and deposit creation. Commercial banks’ loans and investments both facilitate money creation through deposit generation.

“For the banking system as a whole, deposits should not be regarded as a static pool of resources that banks must first accumulate before granting loans and making investments; rather, they are created simultaneously through the very act of lending and investing,” said RBI officials Saurabh Ghosh, Prabhat Kumar, Madhuresh Kumar, and Monica from the Department of Economic and Policy Research.

The officials highlighted that deposits are mainly generated through three channels — bank credit, investments, and foreign capital inflows. These deposits diminish when holders liquidate them by withdrawing cash or repaying loans.

Furthermore, on the balance sheet of the banking system, including the Reserve Bank, non-deposit sources—such as capital, borrowings, and net other liabilities grouped as net non-monetary liabilities—also contribute to the expansion of the liability side.

The authors argued that the credit-deposit (CD) ratio, on its own, may not be a suitable metric to assess the funding vulnerability of a banking system experiencing rapid credit growth.

Instead, a comprehensive review of the overall dynamics of credit and deposit creation and attrition, along with the interaction among various balance-sheet components responding to these dynamics, should be conducted.

“Indeed, the current phase of a rising CD ratio coincides with a growing economy supported by a profitable and sound banking system that adequately meets prudential targets. Therefore, a high CD ratio per se does not signal constraints in credit creation or funding vulnerability for the banking system,” the officials stated.

Published on September 26, 2026