Banks are expected to gain from the income tax incentives announced in the Budget, as the resultant rise in disposable income is expected to bolster current account savings account (CASA) deposits. A part of over Rs 1 lakh crore returning to taxpayers’ hands is likely to flow into bank deposits, strengthening liquidity and driving deposit growth across segments.
“For taxpayers, the proposed tax cuts will lead to incremental increases in disposable income over time, which will positively impact CASA balances. This additional liquidity is certainly accretive to the banking system,” said Harsh Dugar, executive director, Federal Bank.
He said a portion of this extra income is likely to be directed towards savings. While some individuals may choose to keep funds in their savings accounts, those with a lower risk appetite might opt for recurring or fixed deposits. “As a result, banks can expect to see gains across all three categories – current accounts, savings accounts and fixed deposits – enhancing their overall deposit base.”
The announcement to cut taxes has come at a time when banks are struggling to mobilise low-cost deposits. Over the past one year, banks have seen the CASA ratio declining as depositors moved their funds to high-yield fixed deposits. With liquidity being tight, banks have hiked fixed deposits rates to mobilise funds to drive the credit growth. In the third quarter results, most of the banks witnessed year-on-year decline in CASA deposits.
“The impact of these tax cuts is likely to be more noticeable in savings accounts, rather than current accounts, as individuals generally prefer not to hold large balances in current accounts,” said Vivek Gupta, president and head of wholesale banking products, Axis Bank. “We expect the increased savings arising from tax cuts to reflect, via spends, in slightly increased merchant throughputs as well as some upside to current account balances across the merchant ecosystem.”
According to Gupta, senior citizens, who stand to benefit from these measures through additional funds, may keep their money in the banking system for a longer period. “Given their financial preferences (relative to the younger generation who may move to MFs or related financial instruments) they are more likely to park these funds in savings accounts or fixed deposits, further contributing to deposit growth.”
Experts say additional funds spent on consumption will boost banks’ current account balances.
“When people spend the extra money they save from tax cuts, those funds flow into businesses and establishments, many of which maintain current accounts with banks. This, in turn, leads to an increase in current account balances,” said Madan Sabnavis, chief economist, Bank of Baroda. “Furthermore, a portion of the tax savings may be directly deposited into savings accounts, boosting overall CASA deposits for banks.”