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Credit Growth Outpaces Deposits

Indian banks are in the middle of a deposit war due to liquidity drying up!

To summarize, the rise in Credit growth i.e., people buying things on 'Credit' has been outpacing the rate at which they are Depositing money in the bank. So much so, that credit growth for Q2 FY'23 was ~2X of aggregate deposits in this period.

Now there are 2 broad reasons why this is happening

a) Attractive BNPL (Buy Now Pay later) models by new age companies

b) Low interest rates on Bank deposits.

BNPL : A debt trap?

With BNPL, a buyer can purchase any item of his choice including electronics, clothing, Vehicles etc. instantly and choose to pay the cost of these items at a later date, with an interest on top. This basically aims at fulfilling a buyer's instant gratification.

Now, while new age startups like Afterpay, lazypay and many more have managed to grab a sizeable audience to this, one can only wonder if this can lead to a larger credit crisis, if buyers are not able to pay back this amount especially in country like India where only the top 1% can actually afford to buy and repay the enhanced cost.

To tackle this, SNBL (Save Now Buy Later), BNPL's big brother is now emerging as a growing theme. It is nothing but saving your money now and pushing your needs to a later date when you can actually afford it a.k.a delayed gratification, which is a fundamental rule of investing.

Startups like Multipl & Tortoise are now pushing more for SNBL models which work well by pushing investors to invest their money today in financial assets and spend it later when they have earned a significant return on it.

But this too has many cons to it. Building a portfolio takes time and a strategic approach. Goal-based investing works well for the short term, but may not be the most sustainable solution since it takes more than a decade to actually accumulate and compound wealth over time, especially when planning for your retirement.

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