Banks are seeking innovative solutions to rebalance their credit-deposit ratio. These include reducing the minimum lock-in period for tax-saving deposits to three years to bring about parity with similar equity-linked savings schemes. There may be some merit in this demand considering a structural shift in savings behaviour of Indian households to alternative investment avenues, such as mutual funds and real estate, at a time interest rates had collapsed during the pandemic. Although interest rates have since recovered, returns offered by a rally in the stock markets and a revival of the housing market are crimping bank deposit growth. Accompanied by strong demand for credit, a key banking metric is deteriorating, prompting RBI to suggest banks review their business strategies.Credit growth is expected to slow down this year, but not by enough to cause a significant uptick in banks’ loan-deposit ratios. Persistently slow deposit mobilisation, relative to loan advances, affects banks’ ability to lend and their profit margins by forcing them to raise costlier capital. This has an effect on interest rates at a time RBI is evaluating rate cuts while keeping liquidity tight in the financial system. Although monetary policy has a handle on liquidity and interest rates, alteration in household saving preferences is a largely exogenous variable. Hence the need for some out-of-the-box thinking to improve monetary transmission.RBI has also flagged the issue of runaway credit growth that is outpacing nominal GDP, while deposit growth remains in line. It has raised risk weights for unsecured loans that were feeding consumption. Sustaining high economic growth requires improved efficiency in routing capital to the most productive sectors, as opposed to self-limiting consumer credit. As more households emerge from pandemic-era dissavings, bank deposit mobilisation should begin to catch up with loan growth. Rationalising fiscal incentives among investment choices would also be part of the larger project of uniform tax treatment.
