Concerns about slowing deposit growth are a "statistical myth," according to economists at SBI. They stated on Monday that the total amount of deposits has actually exceeded credit growth since the financial year 2022.
In their report, the economists highlighted that nearly half of the term deposits are held by senior citizens, while younger individuals are exploring higher-yielding investment options. The economists of the country’s largest lender advocated for adjustments in tax treatment on deposits to enhance bank liquidity and support credit expansion.
The report noted that deposit growth since financial year 2022 has reached Rs 61 lakh crore, surpassing the Rs 59 lakh crore increase in credit.
The report argued that claims of declining deposit growth are misleading, as the real issue is the misinterpretation of data, with credit growth being mistakenly seen as a sign of weakening deposit growth.
It can be noted that for over one year, concerns have been expressed about the wedge between deposit and credit growth, which has led to questions around the sustainability of credit growth in the absence of sufficient deposit accretion.
In this 'war for deposits', banks have been forced to raise interest rates, which has hurt their profitability with lower net interest margins, and have also resorted to alternatives on liability management like commercial paper and certificates of deposit.
In the report, SBI economists acknowledged that in financial years 2023 and 2024, the growth of deposits has been trailing credit, at Rs 24.3 lakh crore and Rs 27.5 lakh crore, respectively.
The Indian banking system is in its 26th consecutive month of slower deposit growth, the report said, adding that historically, there have been such episodes of deposit growth trailing credit growth that lasted between 2 and 4 years.
The current divergence cycle could end between June 2025 and October 2025, the economists said, based on their expectations on past experience, and hinted that credit growth may slow down in the interim period.
Additionally, with the new guidelines on liquidity asking banks to keep wider buffers may lead to a short-term slowdown in credit growth, it said.
The report said the saving account balances are held only for transactional purposes, resulting in the decline in the low-cost current account and saving account balances for the banks, while even in the case of fixed or term deposits, there is a move away from banks to other high-yielding alternatives.
"Remarkably 47% of term deposits are now held by senior citizens, implying the younger cohort is increasingly shying away from traditional avenues like bank deposits," it said, pitching for a change in tax treatment on deposits.
"In line with mutual funds/equity markets, we are of the considered opinion that the government should tweak the 'tax on interest on deposits and delink tax treatment at the highest income bucket.... and tax treatment should be at redemption and not at accrual basis for bank depositors," it said.
Tax has a net impact of 7% on deposits of banks and there is a need for 'sincere thinking' on treating deposits uniformly as a different asset class, it said, adding that a uniform tax treatment like a short and long term will have minimal impact on government revenues.
The state-run lenders have been more active in tapping into the low-cost deposits, the report said, adding that the average ticket size of savings/term deposits of Public Sector Banks comes to Rs 72,577, as against Rs 1.60 lakh for private sector banks and Rs 10.5 lakhs for foreign banks.
(With Inputs From PTI)
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