On Saturday, the Reserve Bank of India’s monthly bulletin published a groundbreaking analysis, arguing that deposits are not a binding constraint for credit creation. This challenges the traditional banking view that banks must gather deposits before they can issue new loans.
16.7%
NBFC Credit to GDP
FY25 Credit to GDP: 15.9%→16.7%
⏳ Time Machine
How today’s news fits into the bigger picture
1935
Establishment of the RBI
The Reserve Bank of India begins operations, managing national currency and credit under a traditional colonial framework.
2014
Bank of England landmark paper
The Bank of England publishes an official paper confirming that commercial banks create money when they lend, not when they receive deposits.
2024
Deposit-credit gap widens
Indian regulators express concern as credit growth outpaces deposit growth, sparking a national search for retail savings.
Today
RBI bulletin clarifies that deposits do not act as a binding constraint for credit creation on Saturday.
What happens next?
Commercial banks may temper their aggressive interest rate hikes on retail deposits over the next quarter.
On Saturday, September 26, 2026, the Reserve Bank of India released its latest monthly bulletin containing a major theoretical shift: deposits are not a binding constraint for credit creation. Traditionally, commercial banks operate on the fractional reserve theory, believing they must first attract deposits to fund new loans. However, the RBI analysis highlights that in a modern financial system, banks actually create deposits by writing new loans, and system-wide liquidity is governed by central bank operations rather than individual savings. This perspective comes as banks struggle with a widening gap between credit demand and deposit growth.
💭 If you're wondering…
When a bank approves a loan, it does not hand over physical cash from its vault; instead, it types a digital balance into the borrower's account, creating new electronic money.
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