Ever wondered where your money goes once it is deposited in the bank? Does your Rs 100 note simply sit in a vault, or does multiply in the economy?
Zerodha co-founder Nikhil Kamath has explained how money deposited in bank multiplies over time, primarily through lending and spending. He highlighted that Indian banks play a key role in deciding the pace at which money mulitpies in the economy, adding that the process is intentionally kept slower.
In a post on the social media platform X, Kamath wrote, "One printed Rs 100 turns into Rs 500 across the economy. Banks decide how much. India runs this slower than the rest of the world. 50% credit-to-GDP against a global 148%. On purpose."
He added, "The instinct was built in 1969 and never left. It's the shield that kept India out of 2008. It's also the ceiling. You can't fully have one without the other."
Here's an illustration -
Where does your deposited money goes in a day?
Suppose you deposit Rs 100 in a bank, of which Rs 79 is lent out, while the rest Rs 21 is reserved for SLR and CRR. The lent out money is spent by the borrower that goes in the account of someone else and banks lends most of it again.
How banks multiply money?
Once the RBI prints a Rs 100 note and it is deposited in a bank, it keeps a portion as reserves and lends the rest. As the loan is spent, redeposited and lent again, the same Rs 100 supports multiple rounds of lending and eventually becomes Rs 500, increasing bank deposits in the economy. This process is regulated by the RBI to ensure money creation remains under control.
A similar method has been adopted across the world, where most countries lend significantly more to the private sector. The world average of domestic credit to private sector as a portion of GDP stands at 148%, while for India's it is much lower at 50%. This metric is higher for top economies such as US and China at 216% and 182% respectively.
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According to Kamath, domestic credit given to the private sector is intentionally kept low in India as deposits are primarily reserves for the country. Banks keep these reserves, lend slowly and keep buffers to avoid blow-ups. This results in lower risk and speed.
A Cautious Approach
India solidified this position in 1969 after governement nationalised 14 banks overnight with the focus on safety and inclusion. Prior to this, banks were owned by industrial houses, which collected the public's deposits and lent them back to their own companies. Hence, an agrarian economy, could not lend to farmers. Post 1969, news rules aimed to utilise public savings to serve everyone, including farmers, small business and rural India.
Citing recent trends, Kamath highlighted how lending growth nearly halved in a year. In June 2024, lending growth stood at 19% dropping to 9.6% by June 2025. Banks opted for a two way approach through tight lending by pulling back from unsecured retail and NBFCs, while announcing rate cuts to push liquidity. While this approach results in lesser growth, it protects from external shocks by keeping enough reserves.
"No crisis. No regulation forcing their hand. Just the reflex, deciding on its own to slow down," Kamath said.
According to him, this method has protected India from the recent Middle East conflict, while focusing on holding its growth below its potential. Kamath advocated that holding growth is not a flaw in the system, it is working exactly as designed.
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