What makes deposits lag behind advances? Bankers differ on why

Mumbai: Deposit growth has been lagging behind gains of late, triggering a vigorous debate among bankers, including the RBI, on the reasons for this divergence and how to boost savings.

The country’s top bankers on Thursday sharply disagreed over the causes of the mismatch between deposits and loans. Some blamed mutual funds, which were earning higher returns, and sought support from the government and regulators to allow bank deposits to earn higher returns so they could compete with fund managers. Others called the diagnosis simplistic.

Lower bank deposits

Speaking at the Financial Institution Benchmarking and Calibration (FIBAC) banking conference, MV Rao, president of the Indian Banks’ Association (IBA) and executive director of the Central Bank of India, noted that bank deposit returns are lower because the end use of savings is strictly regulated, limiting lenders’ ability to use them more profitably.

“The returns offered by mutual funds are higher because the use of our resources is very strictly regulated by the regulatory body and you cannot get higher returns on that investment. If you look at mutual funds, the end-use checks and their utilisation are unrestricted,” Rao said. “But going forward, we need to evolve and ensure that depositors get higher returns. In that regard, the involvement and active participation of the government and regulators is required,” he added.

Despite the current mismatch, bankers at the conference organised jointly by industry body Ficci and the IBA (FIBAC) said the lag in deposit growth was a transitory rather than a structural problem.

Bank of Baroda Chief Executive Debadatta Chand said banks need to innovate on deposits.

“If you look at the deposit aspect, these are not going to be a generic product, but now they have to be an integrated product. So, if I expect a customer to open a new savings account right now, I may have to integrate it to offer many other products along with the savings account to mobilise more deposits,” Chand said.

Chand said deposit mobilization, which is a constraint at the moment, will improve. “I think the current growth in advance deposits is transitory, not structural,” he added.

Is it due to mutual funds?

HSBC Chief Executive Hitendra Dave said blaming mutual funds for the current slowdown in deposits will not help. He attributed the slow growth in deposits to the huge cash balances held by the government due to the election season.

“I think it’s an overly simplistic argument that since, say, people are putting money into mutual funds, banks have less money available. You know, because even mutual funds buy something that someone sells, so liquidity comes back into the system,” Dave argued. “So, I think it would be a good idea to do a study on what typically causes deposit creation. And I think unless we keep blaming SIPs or mutual funds, we might be solving the wrong problem, in my opinion,” he said.

Bank credit manipulation

The latest data from the Reserve Bank of India (RBI) showed that while deposits grew by 11.7% in the quarter ended June, bank credit rose by 15%. According to a Business Standard report in August, banks have urged the Finance Ministry to have government cash balances held by them, instead of the Reserve Bank of India (RBI), to help improve liquidity. Under a new cash management framework, SNA-SPARSH, introduced in 2021, government cash balances were directed to the RBI instead of commercial banks.

According to the State of the Economy article published in the June bulletin, RBI officials said that banks will soon have to align their credit and deposit growth and normalise credit-deposit ratios. Over the past one year, credit growth has outpaced deposit growth. Banks have been raising funds through short-term certificates of deposit and high-value savings accounts and fixed deposits.

“Going forward, the low share of low-cost current and savings deposits in total deposits may dampen banks’ domestic fund-raising efforts through high-cost funding options, due to a likely contraction in banks’ net margins. This may also force banks to more closely align loan growth with deposit growth and normalise incremental credit-deposit ratios,” the RBI said in its bulletin.