Surge in bank deposits due to govt borrowings, not savings: India Ratings

While deposit accretion has been strong, there has been shift in the profile of banks accruing them

The sudden surge in bank deposits is due to a rise in overall borrowings of both the central and state governments, rather than increased savings, according to India Ratings and Research (Ind-Ra).

Also, while deposit accretion has been strong, there has been shift in the profile of the banks accruing them. Depositors are focusing on quality and safety to differentiate between banks, according to India Ratings.  

Deposits in banking system have grown by 10.6 per cent (year-on-year basis) till May 2020, up from 10.1 per cent in May 2019. The credit growth has almost halved to 6.3 per cent in May 2020 from 12.7 per cent a year ago, according to Reserve Bank of India data.  

Banks with “AAA” ratings have witnessed an increase in the deposit accretion rate (both on QoQ and YoY basis in Q4FY20), whereas new-age private banks, regional banks and small finance banks (SFBs) have mostly slowed down. This has created a divide in the banking segment deposit rates.

Rating agency said as against the common myth, this growth in deposits has not been on account of a surge in savings. Not only the lockdown has caused a significant decline in overall purchases, it has also eroded the income and wealth of producers and sellers. Therefore, there is almost not much impact on aggregate savings.

This deposit growth has been on account of a process known as endogenous money creation, where incremental credit creates fresh deposits in the banking system. During January to May 2020, incremental credit in banking system remained tepid, but the centre and various states borrowed significantly.

The support from the Reserve Bank of India to the central and state governments has increased substantially through ways and means advances to address short-term funding gap for the respective governments. This is along with open market operations to ensure the system liquidity is at ease.

While there has given a fillip to reserve money, muted bank credit has reduced broad money creation, leading to a lower multiplier, the rating agency added.