WHY ARE BANK DEPOSITS FALLING? RBI ANSWERS...

The monthly bulletin published by RBI is pretty telling.

At a time when we are grappling with low consumption and tight liquidity, a few insights by the RBI, which are based on indepth study of macro economic data is quite illuminating.

The underlying story here is fall in bank deposits on one hand and on the other, a revival of credit demand. The widening wedge between credit and deposit growth is triggering concerns about a structural liquidity gap in the system.

According to a report issued by Crisil Ratings, banks will need to raise around Rs 25 lakh crore over the next two financial years. This is substantially higher than the average annual deposit mobilisation of Rs 7 lakh crore over the past two years.

RBI has stated that since November 2017,  bank credit growth rose to 9.3% from an all-time low of 4.4% in February, 2017, after a 75-month prolonged deceleration. RBI has said that contrary to the widely held perception of slowing deposit growth, there has been an acceleration building up from the beginning of 2018, after a 53- year low of 3% in November 2017. At end March 2019, deposit growth at 10% was, in fact, marginally higher than its 15-year trend.

What we learn is that this gap between deposit and rising credit demand is the main reason why banks are unable to pass on rate cuts to the people.

The biggest finding of this detailed study – more than the growth in interest rate, deposit growth is very closely linked to the growth in income. This is the single biggest driving factor for growth in deposits.

A few findings from the report:

• Empirical results reveal that income and financial inclusion are long-term structural drivers while the interest rate and Sensex returns impact deposit growth in the short-run.
• The share of demand deposits in aggregate deposits has declined while that of time deposits has increased.
• Time deposits account for around 88 per cent of aggregate deposits.
• Deposits mobilised by public sector banks appear to be the prime mover of aggregate deposits.
• Foreign banks posted a smart upturn from a contraction in October 2011 and private banks appearing more resilient, with the pick-up in their deposit growth having commenced from September 2013.
• Besides income and the interest rate, mobilisation of deposits seems to be affected by substitution effects emanating from small savings – this prevents banks from cutting rates below that offered by small savings.
• There has been growing popularity of mutual funds and other stock market instruments and a waning of the traditional preference for physical assets such as real estate and gold.
• Opposing movements between Sensex returns and deposit growth are indicative of substitution effects.
• Financial inclusion boosts deposit mobilisation over long run – clearly expansion on bank branches must continue.