The untold story of bank deposits

Indian banks never had it so good. The banks and the stakeholders like the government of India and the Reserve Bank of India (RBI) have worked assiduously in the last decade to ensure a stable, resilient and adequately capitalised banking system that is a sine qua non for financing India’s growth story. For the decade ended FY24, Indian banks’ consolidated profit was Rs 3.2 trillion, a four-fold jump over FY14. Deposits and Credits have jumped by 2.7 times during the period, with the asset quality now among the best along with all operating ratios. In terms of capitalisation, in dollar terms, the market capitalisation of Bank Nifty has jumped by a staggering 2.9 times since the pandemic. 

Against this background, there have been stories expressing concern that deposits in the banking system have significantly fallen behind and that household savings in bank deposits are being crowded out as a result of financialisation of household savings. For the record, there are currently 2,650 million deposit accounts in the system against 400 million credit accounts. Both these concerns need to be fact checked. 

Firstly, the numbers suggest that the incremental deposit growth at Rs 61 trillion has outpaced the incremental credit growth at Rs 59 trillion since FY22. Hence, deposit growth has actually outpaced credit growth. What is thus actually important is whether such quantum of deposit growth is enough to fund the credit requirements of an economy expanding at 8 per cent and at what price it is being mobilised.

 

Secondly, as financialisation of household savings has gathered significant momentum after the pandemic, households are indeed investing in alternative instruments of savings like mutual funds, equity and non-bank deposits. These instruments accounted for Rs 3.2 trillion, or 10.5 per cent of incremental household savings at Rs 29.7 trillion in FY23. 

Households still invested Rs 10 trillion in bank deposits and another Rs 2.5 trillion in small savings deposits out of this Rs 29.7 trillion pie, or 42 per cent. The remaining were household investments in pension and provident funds channelled by respective market players. 

Many analysts mistakenly consider such savings in alternative instruments as a leakage from the financial system and therefore a cause for decline in bank deposits. This is however incorrect, as banking deposits are purely used for transactional purposes through which households change instruments of savings, say from bank deposits to mutual funds or equities (except deposits in small savings) and hence it stays within the financial system. 

But why is there so much noise regarding the deposit growth? For this, we need to understand the dynamics of the Rs 61 trillion incremental deposit growth since FY22. There is indeed a regulatory dispensation and a leakage of deposits from the financial system that has to be accounted for in estimating the residual lending pie for banks. 

The pie of Rs 61 trillion constitutes the overall lendable resources of the banks. However, it has to be adjusted for the regulatory dispensation of RBI. These are in the form of CRR, SLR, and LCR requirements. As of now, such dispensation is at 30 per cent the sum total of aggregate deposits at 4.5 per cent CRR requirement, 18 per cent SLR and 7.6 per cent arising because of LCR regulations. Of course, investment in SLR is also lending by banks to the government of India. 

Next is the leakage from the system that is at 31 per cent. There are four leakages from the system. The government’s cash balance is at 10 per cent of the pie. As the government has been moving to just-in-time disbursement of funds for Centrally Sponsored Schemes that have a matching state share, there has been a change in the process flow for such disbursement. 

Earlier, the states used to identify a single nodal agency (SNA) for each scheme and open accounts accordingly with banks. However, in the new dispensation, these accounts are now opened by the Centre at the RBI, with subsequent release through the states’ financial management system. The government’s cash balance, a by-product of government spending earlier through bank deposits, is now happening from the RBI. 

Then there is the leakage through tax payment on deposits and also self-assessment tax that is 8.7 per cent of the leakage. Bank deposits are subject to taxation at the highest income buckets and the deposit amount (principal and interest) is taxed at accruals. This is in contrast with other asset classes, where the tax treatment is different and the realisation is taxed only at redemption. 

There could be an alternative argument that deposits in countries such as the United States and in the European Union are taxed at the highest income bucket only. However, such an argument misses the point that deposits in India are mostly retail in nature and it should be our endeavor to protect them (80 per cent in India against 34 per cent in the EU). With India transitioning to net zero, there is an additional fund requirement of Rs 7.6 trillion till 2032 and thus a uniform tax treatment for bank deposits along the lines of other asset classes is the need of the hour. 

The other two leakages are small savings (these are only shadow accounts with banks) at 7 per cent and currency with the public at 5.3 per cent. Thus, the overall lending pie is at 39 per cent, or Rs 23.9 trillion, of which priority sector commitments are at 15 per cent. 

To sum up, regulatory dispensation and leakages are indeed constraining factors in overall deposit pie available for lendable resources. Though there could be a debate on the extent of such prescriptions, some of these measures also aid financial stability and could change direction in the future. 

Additionally, banks need to evolve towards products that could cover the lifecycle needs of the customer. Separately, since states in India exhibit different characteristics regarding deposits, it might be a better idea to think of having bespoke products specifically suited to the customers of different states.

The author is Group Chief Economic Advisor, State Bank of India, and member, 16th Finance Commission; views expressed are personal