Opinion
India’s bank deposit slump: Time for radical new ideas?
Summary
- As lenders fall short of money to on-lend and policymakers urge them to innovate on attracting deposits, tax incentives may help, but an out-of-the-box approach would be to restructure banks as pure lenders while public deposits are centralized with RBI.
Indian regulators and policymakers have amplified their call for banks to become innovative in raising deposits. This low-cost source of funds is trailing the pace of bank lending, and if credit-deposit gaps persist, lenders would either need to rely more on costlier sources or go slow on credit, which could drag the growth of our economy back.
Over the weekend, finance minister Nirmala Sitharaman exhorted banks to pre-empt such a scenario. A similar appeal was made by Reserve Bank of India (RBI) Governor Shaktikanta Das. The Economic Survey has also flagged the problem. In 2023, credit grew by almost 16%, while deposits went up around 13%.
In previous years, the gap was larger, except for a pandemic blip of depositors piling up money in their accounts while loans got disrupted. In 2022, for example, credit grew nearly 15%, but deposits rose by less than 10%.
Also read: War for deposits: Banks’ biggest headache now coming for investors?
This trend can partly be blamed on the repressively low rates of interest that depositors got for an extended stretch, even as the concept of ‘real’ returns—after taking inflation into account—gained traction at the retail level.
Frustrated households had no qualms shifting their savings to capital markets, nudged along by a stock-market bull run and easy-swipe apps for share trading on mobile handsets. Today, hikes in deposit rates by banks look too tiny to lure depositors back.
Another deterrent was a tax regime that favoured debt funds over bank deposits by offering the former not just indexation benefits, but also a light burden on long-term capital gains. That anomaly, however, has been fixed: indexation was axed in 2023 and their earnings are now taxed at one’s income-tax slab rate, as with bank deposits.
This may have levelled the field, but no fiscal effort has been made to make deposits more attractive. An idea worthy of consideration might be to relieve bank deposits of the tax currently levied on interest earnings.
Also read: FM Sitharaman urges banks to boost deposits as lending surges, warns of liquidity risks
This would incentivize savers to save the classic old way, by keeping money with banks for fixed periods (or instant withdrawal). Combined with more generous paybacks on people’s savings, this may work better than relying on marketing gimmicks and flashy ads to attract deposits.
But what if India’s deposit slump reflects a bigger problem? At one level, analysts worry that while relatively savvy savers are turning into yield-seeking investors as they ascend the risk-return curve of finance, our base of first-time savers is not expanding fast enough to feed banks.
At another level, the role of banks as financial intermediaries might have begun to diminish. Instead of lenders using our deposits to on-lend at higher rates, thriving capital markets allow easy money to be raised directly via bond and share issues. We can’t have lenders wilt, though.
Also read: Indian banks are staring at worrisome savings and investment trends
They’re valuable to our economy for what they specialize in: an ability to assess risks and price loans profitably. As this is why we need banks, a radical idea suggests itself. Why not centralize public deposits with the central bank to let lenders focus on their job of risk pricing and lending?
Modern technology and a digital rupee could enable a gradual rejig. Depositors could park money online with RBI, which would maintain e-rupee ledgers and pay slightly lower interest for the extra safety of these funds, which lenders could then access for long periods at a special RBI rate to offer loans.
An enlarged RBI role would push it to work out how best to mobilize deposits, even as it watches banks closely to ensure they stay solvent. With banking in flux, this seems like a good time to grapple with such novel ideas.
