Investors renew faith with bank deposits

Returns on gold have tanked and gullible investors have learnt the perils of Ponzi schemes. The old faithful,bank deposits are looking attractive to more investors

Written by Surabhi | New Delhi | Published: June 17, 2013 4:47 am

Volatile stock markets and a hefty import duty as well as other restrictions on gold seem to have once again made investors wary. Add to this mix,a depreciating currency,softening inflation and concerns over get-rich-quick chit funds that have rocked a number of states. But with the financial shake-up,investors seem to be running to the good old bank deposits for security.

On Thursday,the country’s largest lender — State Bank of India reported a near 60 per cent rise in bank deposits so far this fiscal. In absolute terms,the bank’s deposit growth till now has been Rs 41,000 crore as against Rs 26,000 crore it had notched up in the same period last fiscal.

The data,which came after the bank registered negative growth in bank deposits in the last two quarters,surprised even the bank’s chairman Pratip Chaudhuri who called it a “flight to safety”.

“In many parts of the country,many (ponzi and bogus) schemes are not able to redeem their deposits. So then SBI becomes a beneficiary,” Chaudhuri said in a recent interview.

In an indication that this trend is not restricted only to one particular bank,the Reserve Bank of India too has reported a 13.4 per cent rise in deposit growth at Rs 62,000 crore year on year on 31,which is largely in line with its 14 per cent growth target in the segment for the whole fiscal.

This pick up in deposit growth is despite the fact that most banks have begun to lower deposit rates,at least in the bulk segment.

For instance,the State Bank of India had recently cut deposit rates by 25 basis points on two tenors.

Analysts too have expressed surprise at the recent development,as typically bank deposits like most other small savings schemes and insurance products tend to register a growth only towards the second half of the fiscal.

“Given the extreme volatility in markets and lower inflation rates,bank deposits may re-emerge as an attractive option that give guaranteed returns over a period of time. Gold too is losing its sheen as its recent price fluctuations have worried investors over returns,” said Abheek Barua,chief economist at HDFC Bank.

Banks currently offer fixed deposits at rates ranging between 3.5 per cent to a little over 9 per cent,depending upon the tenor and the amount.

Senior citizens can avail an additional 0.25 to 0.5 per cent on the deposit,while some banks also offer special schemes and rates to pensioners.

The tenor of the deposit can be as less as seven days to as long as 10 years. Banks,however,tend to frown upon premature withdrawals which may result in a lower interest rate as a penalty.

But the interest is,however,taxable,unlike small savings schemes like the public provident fund (PPF) tax exempt. But unlike the Rs 1 lakh cap on investments into the public provident fund and other similar instruments,there is no ceiling on the amount that individuals can put into term deposits.

Till the time wholesale price index based inflation was in double digits,the interest rate on bank deposits were not seen as attractive as the real return (based on the inflation rate) was negative. But with headline inflation now softening to near 4 per cent,bank deposits are back to giving positive real returns.

“Chronically,high inflation of recent years has pushed down real interest rates to negative territory despite the rise in policy rate and tight liquidity,” a recent Deutsche Bank report said,adding that as a result the (smaller) stock of savings was channeled increasingly to gold and real estate.

Data show that household savings declined to 22.3 per cent of GDP in 2011-12 from a peak of 25.2 per cent of GDP in 2009-10. There was also a discernible decline in financial savings,reducing the pace of deposit growth in the banking system,the report further noted.

However,for 2013-14,Deutsche Bank has predicted a rise in real interest rates through out the year.

“As real rates rise,the incentive to deposit money in banks will rise. There may well be another reason for deposits to rise this year,” the bank has said.

Analysts are,however,quick to warn that while real interest rates may well continue to rise,banks may be forced to lower deposit rates during the course of the year.

“As deposits pick up and there is also need to shore up credit growth,banks would lower lending rates. This can not be done in isolation and would also result in a reduction in deposit rates,” Barua said.

surabhi.prasad@expressindia.com

The money trail

State Bank of India has reported a near 60% rise in bank deposits so far this fiscal. In absolute terms,the bank’s deposit growth till now has been Rs 41,000 crore as against Rs 26,000 crore it had notched up in the same period last fiscal

The Reserve Bank of India too has reported a 13.4% rise in deposit growth at Rs 62,000 crore year on year on 31,which is largely in line with its 14% growth target in the segment for the whole fiscal

The pick up in deposit growth is despite the fact that most banks have begun to lower deposit rates,at least in the bulk segment. For instance,the State Bank of India had recently cut deposit rates by 25 basis points on two tenors

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