Short read: The Untold Story of Bank Deposits

Whilst the Indian equity markets have been on fire, not breaking a sweat over any perceived disappointments, be it the election results or the unwinding of the Yen carry trade nor the fairly muted earnings season that went by. Yet Indian banking stocks have lagged over concerns over a deposit crunch (deposits are the raw material for bank loans). Everyone from bank CEOs to investors to indeed the finance minister earlier this week, have raised concerns over the issue. In a seemingly healthy economy amidst a rocking financial market, why would banks struggle to raise deposits? Indeed, amongst the various explanations bandied around, one of them is the buoyancy in the market itself i.e, individuals and corporates are happy to participate in the market than keep their deposits in banks. Naysayers argue whilst that might explain partly how deposits are counted from a regulatory liquidity perspective, those monies should remain within the banking system.

Here’s a more nuanced explanation from the country’s largest bank, State Bank of India’s Group Chief Economic Advisor and member of the 16^th Finance Commission, Soumya Kanti Ghosh.

He first questions the fact that deposit growth has lagged credit growth:

“…the numbers suggest that the incremental deposit growth at Rs 61 trillion has outpaced the incremental credit growth at Rs 59 trillion since FY22. Hence, deposit growth has actually outpaced credit growth. What is thus actually important is whether such quantum of deposit growth is enough to fund the credit requirements of an economy expanding at 8 per cent and at what price it is being mobilised.”

Then he rebuts the financialisation of savings argument:

“…households are indeed investing in alternative instruments of savings like mutual funds, equity and non-bank deposits. These instruments accounted for Rs 3.2 trillion, or 10.5 per cent of incremental household savings at Rs 29.7 trillion in FY23. Households still invested Rs 10 trillion in bank deposits and another Rs 2.5 trillion in small savings deposits out of this Rs 29.7 trillion pie, or 42 per cent. The remaining were household investments in pension and provident funds channelled by respective market players. 

Many analysts mistakenly consider such savings in alternative instruments as a leakage from the financial system and therefore a cause for decline in bank deposits. This is however incorrect, as banking deposits are purely used for transactional purposes through which households change instruments of savings, say from bank deposits to mutual funds or equities (except deposits in small savings) and hence it stays within the financial system.”

What then explains the deposit crunch? The author reckons that whilst the leakage is not from the money going into market instruments, there are other leakages:

“There are four leakages from the system. The government’s cash balance is at 10 per cent of the pie. As the government has been moving to just-in-time disbursement of funds for Centrally Sponsored Schemes that have a matching state share, there has been a change in the process flow for such disbursement.

Earlier, the states used to identify a single nodal agency (SNA) for each scheme and open accounts accordingly with banks. However, in the new dispensation, these accounts are now opened by the Centre at the RBI, with subsequent release through the states’ financial management system. The government’s cash balance, a by-product of government spending earlier through bank deposits, is now happening from the RBI.

Then there is the leakage through tax payment on deposits and also self-assessment tax that is 8.7 per cent of the leakage. Bank deposits are subject to taxation at the highest income buckets and the deposit amount (principal and interest) is taxed at accruals. This is in contrast with other asset classes, where the tax treatment is different and the realisation is taxed only at redemption.

The other two leakages are small savings (these are only shadow accounts with banks) at 7 per cent and currency with the public at 5.3 per cent. Thus, the overall lending pie is at 39 per cent, or Rs 23.9 trillion, of which priority sector commitments are at 15 per cent.”

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