Last week, finance minister (FM) Nirmala Sitharaman asked public sector banks (PSBs) to make concerted efforts to mobilise deposits through special drives because deposits have been lagging behind loan growth. By July-end, deposits grew 10.6% year-on-year compared to a 13.7% growth in loans. Worse, according to the Reserve Bank of India (RBI), the low-cost current and savings accounts (CASA) of banks had declined from 43% of total deposits a year ago to 39% in the current fiscal. About 10 days before the FM met public sector bankers, she had pointed out that lenders need to focus on raising smaller deposits that come in 'trickles' but were the 'bread and butter' of the banking system. Again, the concern was the widening gap between deposits and credit.
Why are bank deposits not increasing in an economy with a 7%-8% growth in gross domestic product, double-digit revenue collection from taxes and massive capital expenditure by the government? The most popular theory is that savers are taking their money out from banks and investing elsewhere. Apparently, this is especially common among the young, who prefer riskier assets like mutual funds and equities. Nearly 47% of term deposits are now held by senior citizens. The RBI governor, Shaktikanta Das, has voiced the same concern, pointing out how alternative investment avenues have become more attractive to retail customers. “Banks are taking greater recourse to short-term non-retail deposits and other instruments of liability to meet the incremental credit demand,” he said, which may expose the banking system to liquidity issues. Some reports indicate that the share of bank deposits in gross financial savings of households has fallen to 29.4% from its long-term average of 33%, whereas the share of mutual funds has risen from 2% to 6%. Some others think this is fallacious. Banks sit at the centre of all financial transactions. If money leaves the banking system and goes into mutual funds, it also comes back into the bank accounts of those whose shares are purchased by mutual funds.
The Solution
Assuming that there are strong reasons for the government to be concerned about lower deposit growth, what could be done about it? Goading bankers usually fetches a poor outcome. Previous finance ministers, even forceful ones like P Chidambaram, have failed to encourage public sector bankers to lend more or persuade people to keep more money in bank deposits. PSBs have their compulsions. Fortunately, there is a simpler way to grow bank deposits: it is to encourage a shift from debt funds to bank deposits.
This shift is easy because, over the past few years, the government’s tax policies have made debt funds far less attractive than bank deposits. The outcome of this initiative will be significant. More than Rs15.44 lakh crore is now invested in debt mutual funds. At least 30%-40% of this money could come into bank deposits with the appropriate nudge. What can be done to make this happen? Three things: incentives for savers (tweak fixed deposits (FD) from a tax angle), a marketing campaign along the lines of bank deposits sahi hai and removing malincentives for bankers who, doubling up as investment advisers, discourage savers from putting money into bank FDs.
Feature for feature, bank FDs are indeed better than debt funds today, mainly thanks to Ms Sitharaman. Their returns are similar but when adjusted for risk, the returns are actually better. The interest rate and principal value of FDs do not fluctuate with changing market conditions. There is nothing better than bank FDs when it comes to safety—the principal is safe, at least in scheduled commercial banks, given how Indian banks are regulated.
But most importantly, until 2023, debt mutual funds had a tax advantage. The tax benefit for long-term debt mutual funds was eliminated by the government on 1 April 2023. So now, debt funds are at par with bank FDs. This means the returns are taxed as any other income of the investor. And yet, more than Rs15 lakh crore is sitting in debt funds.
This money will easily shift with a creative marketing campaign, but some tax benefit will make it even better. The only major difference between FDs and debt funds is that gains from the latter are taxed on redemption, while interest income on FDs is taxed on an accrual basis. While conceptually this is valid—debt funds fetch capital gains while FDs fetch income—since these two asset classes compete with one another, there is a case for creating at least a special class of bank FDs whose interest income will be taxed only on withdrawal. Such FDs will allow a much higher compounding of income for savers and therefore will eventually lead to higher tax collection for the government, on redemption.
There is a fly in the ointment, though. Banks are hotbeds of mis-selling third-party products, mainly traditional insurance. We have come across innumerable cases where the banker encourages savers to put money from matured FDs into a traditional life insurance product, rather than renew the bank FD, because selling insurance earns them a hefty commission.
Even PSBs have high targets for selling insurance to boost their profits. So, if the FM wants to see the 'bread and butter' of banks grow, tackling such mis-selling will help. It is about time this was done, since mis-selling insurance has continued unabated for about two decades, despite protests from bank unions themselves.
(This article first appeared in Business Standard newspaper)
Comments
adityag
3 weeks ago
Good article. This is also one of the reasons why private credit is taking off, competing with private equity. Higher risk coupled with ease of access (at least for HNIs) via AIFs. Gone are the days of "safe investments". Fund managers will have to handle redemptions with caution because liquidity & spreads in the public debt market is very poor. In fact, the FinMin should be boosting this segment, but it hasn't. Until this is fixed, there isn't many options in the debt space. I'd rather not park any funds in Bank FDs.
It seems that inter bank competition has already started to offer attractive interest even on short deposits. In my opinion, once we are above 65 or 70, our major funds should be with bank FDs because they are having very high liquidity. No doubt, MFs beat inflation in the long run, but selling the units in emergency get proceeds into our account after 2 to 3 days.
There are no reasons for small clients to keep money in Bank as:
1. Rich loans are getting written off while poor people are troubled with police and legal cases.
2. Banks main focus were Rich clients and not small and scattered clients, earlier RM never cared about such clients and now they are giving back karma.
3. The whole financial system is corrupt of created to cheat poor like:
a. LIC instead of focusing on Life Insurance has been involved in cheating clients with endowment plans for their agents commissions.
b. Banks trap small clients with non banking products and earn commission without any responsibilities for bad product that they already know is not good for clients.
c. SEBI allowing derivatives to Retailers that should ideally be only for hedging, also SEBI knows that retail investors are losing 90% money but still SEBI will not ban it?
d. Politicians using above for their benefits and their corporate friends, make any change suitable to them that adversely impact small people but who cares?
When Politicians are doing acting, capital market regulator has conflict of interest, insurance is to make clients poor, what to expect from Bank who were busy mis-selling non banking products with 100% no responsibilities and just taking commission?
Many TOP banks in India should get bankrupt like its happen in US in 2008-09 then politicians and regulators and financials markets real face will be in front of Indians.
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1. Rich loans are getting written off while poor people are troubled with police and legal cases.
2. Banks main focus were Rich clients and not small and scattered clients, earlier RM never cared about such clients and now they are giving back karma.
3. The whole financial system is corrupt of created to cheat poor like:
a. LIC instead of focusing on Life Insurance has been involved in cheating clients with endowment plans for their agents commissions.
b. Banks trap small clients with non banking products and earn commission without any responsibilities for bad product that they already know is not good for clients.
c. SEBI allowing derivatives to Retailers that should ideally be only for hedging, also SEBI knows that retail investors are losing 90% money but still SEBI will not ban it?
d. Politicians using above for their benefits and their corporate friends, make any change suitable to them that adversely impact small people but who cares?
When Politicians are doing acting, capital market regulator has conflict of interest, insurance is to make clients poor, what to expect from Bank who were busy mis-selling non banking products with 100% no responsibilities and just taking commission?
Many TOP banks in India should get bankrupt like its happen in US in 2008-09 then politicians and regulators and financials markets real face will be in front of Indians.