Budget 2024: Will Credit-Deposit Mismatch Amid Drop in Savings, Prompt North Bloc To Take Steps?

Indians are slowly but steadily moving away from bank deposits and are opting for other “lucrative” investments options and asset classes. The Reserve Bank of India (RBI) monthly bulletin for July (RBI) shows that though bank deposits continued to form the bulk of investments in the total financial wealth basket in 2022-23, it fell below the 50 per cent mark. In 2011, bank deposits formed 51 per cent of the overall financial wealth basket. It fell to 43 per cent as of March 2023.

This is especially worrying as about 80 per cent of overall household credit demand is being taken care of by these lenders, which are mandated to meet stiff loan targets to power economic growth.

While the focus in the post-Covid pandemic phase has been on expanding credit to boost consumption, the trailing growth in bank deposits could undo the gains.

Recently expressing concern over the rising gap between credit and deposit growth, RBI governor Shaktikanta Das said that this could “potentially expose the system to structural liquidity issues”.

"It goes without saying that there will always be some gap between the two, but credit growth should not run ahead of deposit growth by miles," Das said at an event, acknowledging that households and consumers who traditionally leaned on banks for parking their savings are now increasingly turning to capital markets and other financial intermediaries.

Falling credit-deposit ratio

The credit-deposit ratio – or the ratio of how much deposits is used by banks to extend credit— is currently at about 80 per cent. An excessively high CDR therefore indicates that the bulk of the deposits is being used to extend credit, leaving little scope for banks to manage any contingencies.

The regulator is now closely monitoring the CDR space to ensure that the country’s banking system does not come under any kind of untoward stress. “This would also mean interest rates may not soften in the near future, the regulator will have to monitor the overall health of the banking system as well as the economy but powering economic growth is not the RBI’s core job,” an insider said.

“For banks to be able to lend freely, the government needs to create a conducive ecosystem and encourage people to park their money in the banks…on one hand there is pressure on banks to lend and on the other, there are no incentives for them to grow the deposit base,” a senior public sector bank official told The Secretariat on condition of anonymity.

While the total non-food credit expanded 15.4 per cent in 2022-23, aggregate deposit grew less than 10 per cent. Loan growth in India touched an all-time high of 20.80 per cent last December. Unsecured personal loans and credit cards drove the overall credit growth. Home and vehicle loans have also been in demand.

According to an S&P Global note, Indian retail lending is likely to continue growing. Banks have seen an increase in retail lending despite central bank concerns about the rapid rise of unsecured loans reaching a level of 35 per cent of bank portfolios in 2023-- up from 25 per cent in 2007.

Banks take steps to boost deposits

Several banks have started to announce plans to boost deposits. “However, in addition to the individual measures taken by the banks, there is a need to come up with a holistic plan,” the official said.

The State Bank of India (SBI) recently launched the “Amrit Vrishti” deposit plan offering 7.25 per cent interest on deposits for 444 days. Senior citizens get an additional 0.50 per cent interest rate.

The Indian banking industry has, however, underlined the need to have a similar tax structure for bank deposits and other asset classes and financial instruments such as mutual funds in order to encourage parking in FDs.

Interest that an individual earns on fixed deposits is taxed as per the tax bracket she falls in. Therefore, those coming under high tax brackets are impacted more than others. On the contrary, mutual funds are more tax efficient.

“If we make the deposit rate attractive in line with MFs, then this could push up household financial savings and CASA (current account savings account—which are low cost deposits),” SBI’s chief economist Soumya Kanti Ghosh in a pre-budget note said.

Ghosh added that this will not only bring stability in the core deposit base but also financial stability in household savings as the banking system is better regulated and has superior trust as compared to other alternatives with high volatility and risks.

A reliable source said that the government has taken note of the falling bank deposits especially amid a drop in the net household financial savings at 5.3 per cent of GDP in 2022-23 from about 7.4 in 2013-14.

However, there is a difference between taking note and acting upon the concern. Bankers and depositors are asking if Finance Minister Sitharaman will take steps to make parking money in fixed deposits attractive?