Post demonetisation, Indian households are increasingly shifting their ownership and tenor of deposits, partly incentivised by lower rates of returns on term deposits and alternative avenues of saving which combine the benefits of liquidity and returns, a Reserve Bank of India survey has said. The share of savings deposits in the total deposits of households reached a new high and touched 41.7 per cent in March 2018 against 36.9 per cent in 2016.
Simultaneously, the share of fixed deposits (term deposits) declined from 57.7 per cent in 2016 to 52.5 per cent in 2018. Bank deposits have remained the preferred instrument of household savings in financial assets, followed by provident and pension funds, and life insurance fund. “In 2017-18, however, there was a marked shift, with currency holdings becoming the preferred avenue for household saving. While this reflected the remonetisation that was underway, it suggests that households still prefer cash for transactional needs in spite of the after-effects of demonetisation and the follow-on remonetisation,” the central bank survey said.
The shift is despite the lower rates on savings bank rates of banks. While the interest rate on State Bank of India’s saving bank account rate is 3.5 per cent, its one-year term deposit rate carries an interest rate of 7.30 per cent.
On November 8, 2016, currency notes of Rs 500 and Rs 1,000 denominations accounting for 86.9 per cent of the total notes in circulation were abruptly withdrawn and ceased to be legal tender. As people herded at eligible avenues of surrender, a wall of liquidity moved through the financial system. Current and saving deposits flooded into the banking system and, although the stock of term deposits declined marginally in terms of its share in total deposits, there was a sharp depletion in their share in incremental deposits, the RBI’s first survey on the ownership pattern of deposits with scheduled banks has said.
According to the RBI, this event (demonetisation) appears to have produced a permanent shift in deposit behaviour with households’ preference shifting to savings deposits and away from term deposits. “This suggests a premium on liquidity induced by the shock, partly incentivised by lower rates of returns on term deposits and alternative avenues of saving which combine the benefits of liquidity and returns. While the withdrawal of notes caused a shift in payment habits away from cash, this has proven to be short-lived and mean reversion became evident in 2017-18 itself. Only two states show a break from the central tendency, with a decline in cash dependency,” it said.
The household sector has accounted for 60 per cent of deposits with the Indian banking system in recent years. The share of the household sector increased significantly during 2016-17 and stayed at the same level up to March 2018, although the growth of its deposits moderated in 2017-18 from the demonetisation-induced growth. “The household sector typically holds more than half of its deposits in term deposits and over one-third in savings deposits. However, deposit of specified bank notes (SBNs) in their savings bank accounts generated a sudden jump in their share of savings deposits in 2016-17 and 2017- 18,” the survey has said.
The share of individuals within the household sector jumped to a new high on March 2017 before reducing marginally by March 2018. During 2016-17, incremental deposits were driven up by individuals (82 per cent), followed by Government entities (27 per cent); in the latter, Central and State governments had a combined share of 17 per cent, it said.
The overall behaviour of households’ bank deposits in the recent period has also been affected by schemes such as the Pradhan Mantri Jan Dhan Yojana (PMJDY), the Pradhan Mantri Suraksha Bima Yojana (PMSBY), the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and the Atal Pension Yojana (APY).
Aided by their wide network of branches, public sector banks (PSBs) retained around three-fourth of households’ deposits. Private sector banks, which are the second largest bank group, mobilised more deposits than PSBs during 2017-18. During demonetisation, private sector banks increased their share in the deposits of governments, households and the financial sector. Public sector banks held over 80 per cent of the government sector deposits, but a portion of government sector deposits moved to private sector banks in 2016-18).
Over 2017-18, the RBI engaged in a war-time effort to remonetise the economy by stepping up printing and distribution of currency notes and by introducing the denomination of Rs 2,000. By March 2018, remonetisation was complete and although the stock of currency in circulation was restored to its pre-demonetisation level, the patterns underlying bank deposits were lagged and incomplete in their return to normalcy, it said.