Contrary to the widely held perception of slowing deposit growth, there has been an acceleration building up from the beginning of 2018, after a 53- year low of 3 per cent in November 2017, the Reserve Bank of India has said.
“At end-March 2019, deposit growth at 10 per cent was, in fact, marginally higher than its 15-year trend. Moreover, the decomposition of year-on-year deposit growth shows that the recent acceleration is driven by momentum, despite unfavourable base effects,” the RBI said in a report on bank deposits
Notwithstanding this improvement, it is noteworthy that the recent pick-up is occurring against the backdrop of a secular deceleration that has set in since August 2009, barring the demonetisation driven spike during November-December 2016, the RBI report said.
Outstanding deposits of scheduled commercial banks (SCBs) at Rs 125,72,600 crore as on March 31, 2019 accounted for 128.7 per cent of outstanding bank credit (lower than 132.5 per cent a year ago), reflecting the tightening of financial conditions on account of low deposit growth.
“Bank deposits remain an important part of the financial savings of households and key to the financing of bank lending,” it said. Deposit growth is picking up in recent months in a cyclical upturn since December 2018, which is overwhelming a trend slowdown that has been underway since October 2009.
“The latter warrants policy consideration since deposit mobilisation is fundamental to India’s bank-based system of financial intermediation,” the report said.
According to the RBI report, empirical evidence puts forward several interesting facts about the behaviour of bank deposits.
“It underscores the income as its most important determinant, both in the short-and in the long-run. Second, interest rate matters for deposit mobilisation but only at the margin. Third, financial inclusion has a boosting effect on deposit mobilisation over the long-run suggesting expansion of bank branches in unbanked areas,” it said.
“Substitution effects associated with Sensex returns for deposit growth are limited to the short-run, warranting a careful appraisal of regulatory reforms and tax arbitrage, even as efforts need to be intensified to make both more market determined,” the report said.
“Similar to Sensex return, small savings substitute bank deposits in the short-run but supplement deposits in the long-run, reflecting that limits on income tax exemption eventually evens out substitution effects and allow income to be the key determinant of both in the long-run,” the RBI said.
Therefore, accelerating the rate of growth of the economy and disposable incomes holds the key to higher deposit mobilisation by the banking system, the RBI said.