High real interest rate causing lowering growth in banks

Main reason of banks facing shortage of funds is sluggish deposit at ASCB with meagre growth of 9.9%

High real interest rate is leading to lower deposit growth rate of the banks — a trend which has been prevalent since late 2014, a SBI report has said.

According to the bank's research report, despite a relatively high real interest rate, deposit rates of banks have not picked up.

"Deposits with All Scheduled Commercial Banks (ASCB) have remained sluggish with a meagre growth of 9.9% during fiscal 2015-16 (till March, 2016)," the report said.

"This has resulted in acute shortage of funds with banks for lending purposes," it said.

SBI economic research's chief economic adviser Soumya Kanti Ghosh, who has authored the report, said, "Contrary to popular perception, high real interest rate is actually leading to lower deposit growth rate."

"The divergence between the two has been widespread since September 2014," Ghosh said.

"We believe that given high real deposit rates are the by-product of lower inflation, such negative causation may be resulting in people to spend more/leakage through currency," he added.

Further, the report noted that decline in deposits could also be attributed to increasing outward remittances.

Going by data for liberalised remittance scheme (LRS), the outward remittance has jumped three-fold from $106 million in May 2015 to $449 million in February 2016, on account of revision in ceiling, it added.

LRS is a mechanism available for resident individuals to remit money for any permitted current or capital account transaction or a combination of both through a primary dealer.

Since it was introduced in 2004, the ceiling was revised upwards late in May 2015 according to the prevailing economic scenario. At present, the limit stands at $2,50,000 per Financial Year (April-March).

"All these portend towards the increasing propensity towards foreign consumption rather than towards saving," the report said.