Can banks get Indians to embrace savings (accounts)?
How banks can arrest the freefall of deposits
Indians have famously been risk-averse. We tend to gravitate towards investment in physical assets like real estate and gold, and cash is largely deemed to be the safest way to save.
However, with the growing adoption of mainstream banking services among an expanding middle class and through government interventions like the Pradhan Manti Jan Dhan Yojana (PMJDY), low-cost deposits in current and savings accounts have risen to make up a healthy 41% of all bank deposits.
But that hasn’t stopped the Reserve Bank of India (RBI) and policymakers from sounding an alarm about the inadequacy of deposits in Indian banks.
Credit & deposit growth gap widens
While by itself the proportion of banking deposits in India seems to be healthy, the number mentioned above becomes concerning when viewed relative to overall demand for credit in the banking ecosystem. Latest RBI data shows that even though deposits rose 11.3%, credit grew 14% year-on-year.
RBI governor Shaktikanta Das recently raised concerns about this phenomenon stating that the widening gap would pose structural liquidity problems as savings are diverted away from bank deposits to capital markets. As a result, banks are losing access to low-cost deposits that in turn fund loans sanctioned by them.
Today, I’d like to take a look at the possible reasons behind declining deposits in Indian banks.
1. Dalal Street becomes more accessible
The decline in deposits is directly linked with another trend in finance – the rise in investments in the stock market. The National Stock Exchange data shows that more than 120 million investors were registered in the five years between 2019 and 2023, and in January of 2024 alone, more than 5.4 million investors registered. The Association of Mutual Funds in India (AMFI) data shows a similar trend. As of January 2024, 79.2 million SIP accounts were active.
The push to financial inclusion, especially with the aid of digitisation, has made people more comfortable with exploring investment options beyond physical assets. Additionally, trading applications are becoming more and more user-friendly, allowing investors to access capital markets more easily. Moreover, KYC norms for investment in capital markets have been relaxed with the introduction of video and digital KYC solutions.
2. Rise in credit demand
Household debt in India has been on the rise. It increased by 16.5% year on year in 2023, reaching 39.1% of the country’s GDP. A large chunk of this debt is non-housing debt used for discretionary spending and consumer goods. With a large chunk of their income earmarked for repaying household debt, funds in current and savings accounts are bound to take a toll.
Can banks steer customers back towards deposits?
Banks have been making representations to the RBI to help boost deposit growth. Their recommendations include a reduction in the lock-in period for tax-saving fixed deposits from five years to three years. A smaller lock-in period would give them an advantage over equities, ELSS, and mutual funds – instruments that yield better returns but have a five-year lock-in period.
Within the sector, the competition for deposits is intensifying. Banks are raising interest rates on deposits to attract customers. The State Bank of India (SBI) raised interest rates on retail domestic term deposits by 25-75 basis points and on domestic bulk term deposits by 10-50 basis points.
The RBI, banking governance, and other stakeholders are working towards attracting depositors by raising interest rates and lowering lock-in periods. But will that prove to be enough?
I’d love to know your thoughts in the comments!
Cheers,
Rajat