Deposit growth of banks has fallen below the 10 per cent level for the first time in several decades in the wake of a fall in interest rates offered on term deposits and sluggish credit offtake. Are savers shying away from putting money in bank term deposits and small saving schemes?
Data available from the RBI indicates that deposit growth has dipped to 9.9 per cent, which is said to be the lowest in over 53 years, for period ended March 18, 2016 as against 10.7 per cent in the same period of last year. This has happened at a time when retail inflation as measured by the Consumer Price Index (CPI) eased to 5.18 per cent in February as food prices rose at a slower pace, while Wholesale Price Index stayed in the negative territory for the 16th month in a row.
On the other hand, currency with the public has risen from Rs 13.86 lakh crore to Rs 15.93 lakh crore, with bankers questioning the reasons for the jump in the cash with people. Are investors keeping cash with them instead of putting it in term deposits? Several reasons, including the cut in repo rate, other attractive instruments, slow credit offtake are cited by bankers for people keeping away from bank deposits. In a normal situation, depositors should have flocked to term deposits of banks when inflation dips as it would lead to a rise in real interest rates.
Bankers, especially SBI chairman Arundhati Bhattacharya, had asked the RBI to find out the surge in currency with the public. The central bank should examine why the currency holdings with public has increased so much, the SBI chairman said.
Sluggish credit offtake has also prompted bankers to turn lukewarm in chasing deposits. Banks’ investments in government securities are already above the stipulated limit. RBI data shows that credit growth for the period ended March 18 was at 11.3 per cent as against 9 per cent in the same period of last year. “Banks have been rationing credit due to capital constraints given their existing burden of impaired assets and lack of certainty of full and timely recapitalisation,” says an India Rating report.
The RBI had slashed the repo rate by a cumulative 125 basis points in 2015 and inflation moderated sharply to 4.9 per cent in 2015 from 6.6 per cent in 2014, but banks reduced the lending rates by only 60-70 bps but slashed deposit rates by 150 bps. That has been justified by banks and even the RBI saying that the high rates offered on government small savings schemes compete with fixed deposits, making it tougher for banks to lower deposit rates, eventually delaying monetary policy transmission despite successive rate cuts.
The government recently reduced interest rates across small savings schemes by 40-130 bps with effect from April 1, 2016. The reduction in rates has been particularly steep for shorter-tenor instruments (100-130 bps). Lower small savings rates indicate the possibility of a fall in small savings collections in FY17. The government has decided that the interest rates for various small savings schemes for FY17 would be now reset every quarter based on the government securities yields of the previous three months.