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Interest rates fall, but deposits shine on; grow 11.4% in FY21

Despite over a 100-basis point decline in interest rates, bank deposits surged by 11.4 per cent during the financial year ended March 2021, as against 7.9 per cent in the previous year.

Written by George Mathew
Mumbai | April 10, 2021 1:00:57 am
Total deposits increased by 15.45 lakh crore to Rs 151.13 lakh crore in the year.

Despite over a 100-basis point decline in interest rates, bank deposits surged by 11.4 per cent during the financial year ended March 2021, as against 7.9 per cent in the previous year. However, credit growth declined to 5.6 per cent in FY21 from 6.1 per cent in the previous year, according to Reserve Bank of India data.

Total deposits increased by 15.45 lakh crore to Rs 151.13 lakh crore in the year. Time deposits (fixed deposits) rose by Rs 13.01 lakh crore to Rs 132.51 lakh crore while demand deposits (savings bank) jumped by Rs 2.44 lakh crore to Rs 18.61 lakh crore. The rise in deposits has come despite a 100 basis points decline in deposit rate. State Bank of India’s one year FD rate has fallen from 5.90 per cent to 4.90 per cent during the year after the Reserve Bank of India (RBI) slashed policy rate – repo rate – by 115 basis points to 4 per cent since February 7, 2020.

However, the decline in repo rate failed to boost the bank credit which showed a lower growth rate of 5.6 per cent — a rise of just Rs 5.80 lakh crore — to Rs 109.51 lakh crore in FY21 as corporate investments remained sluggish. GDP which contracted by 23.9 per cent in the June quarter of FY21, is expected to grow by 10.5 per cent in the ongoing fiscal.

The increase in deposit growth during the period under review could be supported by outflows in equity mutual fund primarily due to profit booking by investors, says a report by Care Ratings. Moreover, as on March 12, 2021, the liquidity surplus in the banking system stood at Rs 5.7 lakh crore. The liquidity surplus can be primarily attributed to deposit growth outpacing credit growth persistently, it said.

“Interest rates are likely to remain range bound going forward as RBI is committed to ensure easy liquidity and low repo rates,” said Sandeep Bagla, CEO, Trust Mutual Fund. However, real interest rates have remained negative after adjusting for inflation levels. Retail inflation was at 5.03 per cent in February 2021, which is higher than one year term deposit rate of 4.9 per cent. “The real interest rate on the short end of the curve will remain severely in the negative for some time penalizing the savers. One hopes that this does not affect the savings rate materially,” said Dhiraj Relli, MD &CEO, HDFC Securities.

On the other hand, the bank credit growth has continued to be propped up by the retail segment and by disbursements under ECLGS scheme, which had been extended further till March 31, 2021. These have been further supported by various regulatory measures by the RBI in the form of interest rate cuts and CRR (cash reserve ratio) exemption on credit disbursed to new MSME borrowers. As per the circular dated February 05, 2021, the RBI has exempted banks from keeping CRR requirement against loans disbursed to first-time borrowers of MSMEs. Growth figures for year-end March 2021 would have the benefit of lower base of previous year end since that was the period of beginning of lockdowns and disruption of activities, including lending, Care Ratings said.

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