BackReviving financial savings to support growth
The current slowdown has affected business growth of banks which is reflected in their deposit, credit growth
Premium(Priyanka Parashar/Mint)
The biggest concern today is the sharp slowdown in the Indian economy, with gross domestic product (GDP) growth at 5.5% in Q1FY13 marking the lowest in a decade. This is accompanied by a structural transformation of the Indian economy: increasing share of tertiary sector and shrinking space for agriculture even as industry’s share remains stagnant. Domestic savings have also shrunk from a high of 36.8% in 2007-08 to 30.4% in 2011-12.
The declining pace of domestic savings will hurt growth. While the New Manufacturing Policy announced by the government is expected to give a boost to manufacturing industries in the country and the slew of recent reform measures is likely to shore up sentiment and growth going forward, we need to focus on reviving financial savings and bank deposits to support growth.
After all, if we look at countries such as China and Brazil, we see that their growth has been supported by a strong domestic banking sector.
To support credit growth, we need to not only increase financial savings in the economy but ensure a robust deposit growth in banks. The current slowdown in the economy has affected business growth of banks which is reflected in their deposit and credit growth. Growth in bank deposits decelerated to 13.7% year-on-year (y-o-y) on 21 September 2012 from 17.5% y-o-y on 23 September 2011 while growth in bank credit slowed sharply to 16.4% y-o-y on 21 September 2012 from a hefty growth of 19.5% y-o-y on 23 September 2011.
Today, a very high proportion of household financial assets is held in cash (around 12% of total financial assets in FY12 or ₹ 1.1 trillion), which suggests that there is scope to attract resources which are outside the banking system.
With the right policies, bank deposits can become an alternative to cash. To attract these funds to the banking system, we suggest reduction in minimum tenure for deposits from 7 days to 3 days. This will make deposits more liquid besides giving an interest income to holders of idle cash.
Another way to expand financial savings is to incentivize households to move away from gold. Despite a 17% fall in gold consumption in FY12, India remained the largest consumer of gold (around 26%) in the world.
Over the past decade India has witnessed, on an average, an annual growth of 29% and 18% in gold consumption and gold price respectively, outpacing the country’s real GDP growth and inflation. If we are able to convert even 50% of household savings held in gold into financial savings, then our GDP can grow by an additional 1% at least.
However, the banking industry needs to become more efficient so that depositors can be given a higher rate of return and borrowers can be charged less.
For this, we need to address one of the last remaining systemic inefficiencies which has added to the cost base and resulted in a tax on banks and by implication a tax on borrowers i.e. the cash reserve ratio (CRR). High pre-emptions in the past actually retarded growth and only after the financial sector reforms were introduced in 1991 and pre-emptions were gradually brought down that we have seen GDP growth moving into a high growth trajectory with banks helping to add more refining capacity and greenfield airports.
Funds have also been provided by banks indirectly to the government by funding the Airports Authority of India and a large number of government companies and contractors in the infrastructure space.
But for this model of financing, we believe infrastructure development in the country would have lagged behind even further.
The cut in CRR reduces the cost of funds for banks enabling monetary transmission as banks in turn lend out funds at lower rates. For instance, we at the State Bank of India passed on immediately and in full the 25 basis points (bps) CRR cut on 22 September 2012, bringing down the base rate by 25 bps. The reduction at the retail level saw a spurt in demand for home loans and car loans. For most citizens who have taken home loans, the equated monthly instalment (EMI) payout is a very large part of family expenditure and at times, even larger than the food expenditure so the reduction in EMI by the bank will bring significant relief to the household budget.
Overall, the declining trend in savings needs to be reversed immediately and financial savings of the household sector needs to be channelled into bank deposits for productive lending by banks, who have a very important role in ensuring the stability and sustained growth of the economy.
Pratip Chaudhuri is chairman, State Bank of India and Foundation Member of the India chapter of the World Economic Forum.
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