By Madhavankutty G
Banks going on an overdrive to mobilise deposits for better liquidity management was a common practice in the first half of the previous decade. Bulk deposits were the favoured route. These are above a certain threshold and are not classified under retail term deposits. They attract preferential interest rates above the card rates. Banks would even outbid each other to garner funds from wealthy individuals and companies, pushing up their cost of funds.
Fast forward to the present, the divergence between credit and deposit growth has attracted regulatory attention and to pre-empt potential asset-liability mismatches the regulator has revised the bulk deposits threshold from Rs 2 cr to 3 cr for commercial banks. Bank credit growth has averaged close to 18% in FY24 while deposit growth was lagging at 13%.
In theory, this is expected to solve liquidity issues and streamline asset-liability profiles. Parallelly, though not directly connected to this measure, RBI has been cautioning lenders of the risks involved in unsecured lending and the usurious rates charged by non-banks to various sectors. This could have the effect of reducing credit growth and giving a small respite to the divergence. But the question is whether the premise of deposit accretion due to revision in bulk deposit threshold is as simplistic as made out to be.
It is a fairly well accepted fact now that deposit growth is more a function of income. Interest rates might impact only at the margin. Real incomes, adjusted for inflation and taxes, have hardly grown enough in the past decade. Unless there is reasonable certainty of significant real income growth in the days ahead, it may be unwise to pin entire hopes on an interest rate rejig to address the issue.
The savings behaviour of households has undergone a change. Bank deposits as a share of GDP declined from 7.8% in FY21 to 5.8% in FFY23 though it just recouped to 7.9% in FY24. Outstanding deposits posted a CAGR of 7.4% in this period compared with 19% for mutual funds-almost thrice the growth in bank deposits. FY24 has set a new record for the mutual fund industry with its assets growing by 35% compared with 13% in bank deposits. Alternative investment avenues might render revision in bulk deposit cap redundant.
Retail investors will be keen to partake in the equity market bull run rather than flock towards banks. Statistics for June 4, the election day, show that retail investors bought a mind-boggling Rs 1.05 lakh crore and sold Rs 83000 crore in the equity market. Mutual funds bought stocks with Rs 18140 crore and sold Rs 24389 crore on the same day. In this kind of a scenario bank deposits might not see much up move from the current rate of growth.
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To be sure, there will be accretion to deposits at the margin from risk averse investors. However borrowers will have to bear the higher cost of funds as the impact of preferential rates get passed through. This might lead to concerns of systemic risks due to over leveraged households especially when retail borrowers are on a borrowing spree. Moreover, higher lending rates, when private capex cycle is on the cusp of a recovery after years of low activity, may act as a deterrent.
As deposits do not offer sweetners to savers either by way of returns or tax treatment over alterative asset classes, the new saving paradigm outlined above will be the norm. Credit demand, however, will continue unabated as banks are the primary avenue for retail and corporate borrowers. Moreover, when the private capex cycle picks up, credit demand will increase further and add to banks’ liquidity pressures.
The solution could be to make bank deposits more attractive and to nudge corporates towards alternative funding avenues. Some measures which may be considered include reducing lock-in period for availing section 80C benefits on bank FDs from 5 to 3 years (which is a long-standing demand) and exempting retirees and pensioners from tax on deposit interest. Alternatively, we must continue efforts to develop a vibrant corporate bond market to reduce dependence on bank funding. This calls for urgent measures like fast-track debt resolutions and plugging loopholes in the insolvency and bankruptcy law so that even lower rated corporate bonds have a market. Targeted income support schemes will also help, though with a time lag.
(The author is the group chief economist at Manappuram Finance Limited. Views expressed are the author’s own and not necessarily those of financialexpress.com)