India’s banking sector is witnessing one of its best times in terms of profitability and asset quality, but the lagging deposit growth has emerged as a pain point in the last year or so. With bank credit growth continuing to outpace deposit growth, banks will have to try innovative ways to get deposits. ET explains:
What is the current situation of bank deposits?
Credit growth at more than 14% continues to be higher than the deposit growth of around 11%, which means banks are not garnering enough deposits to fund loan growth. As a result, both the finance minister and the Reserve Bank of India governor have expressed concerns about the wide gap.
Why is deposit growth not keeping pace with credit growth?
There are various factors at play. Financial savings in India are undergoing a structural shift with savers wanting to invest in higher-yielding investments. As a result, mutual funds, insurance, pensions and real estate are being increasingly preferred by younger savers seeking a higher yield. Deposits are also tax inefficient with tax charged according to the applicable tax slab from day one of the investment and tax deducted at source even before the deposit matures.
What can banks do to get more deposits?
Besides marketing their deposit schemes, banks can also use innovations like offering special services such as a locker facility for depositors. Banks have been slow to raise deposit rates, so better rates are always an incentive. Also, despite the RBI increasing its repo rate by 250 basis points, banks have not touched their current and savings account rates, which could be a good catchment for future depositors.
How are bankers dealing with the new challenge?
Bankers say they cannot offer astronomical rates on deposits because it will impact profitability. However, changes in tax treatment to ensure TDS is not charged before maturity could help. They point to the sustained rise in the stock market post-Covid and the increase in real estate transactions as two major reasons for deposit growth being muted. They expect savers to come back to the safety of deposits when the stock market corrects.
A report by SBI Research this week highlighted that historically there have been episodes of credit and deposit growth divergence persisting for two to four years. The report predicted that the credit-deposit divergence will end in June-October 2025.
