State Bank of India and other public sector lenders are urging the government to allow them to offer incentives to bolster deposits, which have slumped hitting credit flows.
Banks’ deposit growth in FY24 was well below the rise in credit, forcing them to meet the funding gap through higher-cost Certificates of Deposit (CDs).
Banks have made representations to senior government officials flagging the slowdown in deposits. “One suggestion is that the lock-in period for tax-saving fixed deposits should be reduced to three years from five years,” said a senior bank executive aware of the development.
Bankers have said that, given the bumper returns by equities, mutual funds and tax-saving equity-linked savings schemes (ELSS), investors prefer them to tax-saving fixed deposits (FDs). All these tax-saving schemes have a five-year lock-in period.
Healthy Credit-Deposit Ratio Needed
Reducing the lock-in period for such FDs to three years will address this imbalance, bankers said.
In FY24, aggregate deposits grew 12.9% compared with a 16.3% rise in bank credit, as investors preferred alternative avenues to park their money.
The share of deposits in gross financial savings of households fell from 6.2% of gross national disposable income (GNDI) in FY21 to 4% in FY23, as savings moved to equities and elsewhere. Over this period, investment in shares and debentures increased from 0.5% to 0.8%. “Because of the exuberance in the Indian stock markets, investors have tilted more towards the same. This has an impact on deposit growth,” said another bank executive.
As per data from the Association of Mutual Funds in India (AMFI), the industry’s assets under management (AUM) more than doubled to ₹57.26 lakh crore on April 30, 2024, from ₹24.79 lakh crore on April 30, 2019.
Banks have argued that a healthy credit-deposit (CD) ratio, a measure of liquidity, is needed to finance the economy and large infrastructure projects. As per the latest available data, the CD ratio has been generally hovering at around 80% since September 2023 compared with 75.8% in FY23.
