India’s banking sector is experiencing strong profitability and improved asset quality, but slow deposit growth has become a significant issue in recent times. With bank credit growth outstripping deposit growth, banks will need to explore innovative strategies to attract more deposits.
Bank credit is growing at over 14%, surpassing deposit growth, which is around 11%. This disparity means banks are struggling to collect sufficient deposits to support their loan growth. Both the finance minister and the Reserve Bank of India governor have voiced concerns about this widening gap.
Several factors contribute to the lag in deposit growth. Indian savers are shifting towards higher-yielding investments like mutual funds, insurance, pensions, and real estate. These options are particularly appealing to younger savers seeking better returns. Additionally, deposits are seen as tax-inefficient due to tax being applied according to the applicable slab from the outset and TDS being deducted before the deposit matures.
Banks can enhance their deposit schemes through marketing and by offering added services, such as locker facilities. Increasing deposit rates could also serve as an incentive, as banks have slowly adjusted these rates. Despite the RBI raising the repo rate by 250 basis points, banks have not yet increased rates for current and savings accounts, which could be a potential area for attracting future depositors.
Bankers are cautious about offering excessively high deposit rates due to potential impacts on profitability. They suggest that adjusting tax treatment to avoid TDS deductions before maturity could help. Additionally, they point to the strong stock market performance and rising real estate transactions post-Covid as reasons for the muted deposit growth. Bankers anticipate that as market conditions normalise, savers will return to the relative safety of deposits.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
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