A study by the Reserve Bank of India (RBI) has rooted for regulatory reforms and tax arbitrage, which benefit stock market investments, while flagging risks of slow bank deposit growth.
Similar to Sensex returns, small savings substitute for bank deposits in the short run but supplement them in the long run. It shows income tax exemptions or deductions can provide benefit. Eventually, they even out substitution effects and allow income to be the key determinant of small savings and bank deposits in the long run. This warrants an appraisal of regulatory reforms and tax arbitrage even as efforts need to be intensified to make both market-determined, according to the Reserve Bank of India study “Bank deposits — underlying dynamics”. The study appeared in the May bulletin of the RBI.
Accelerating the pace of growth of the Indian economy and disposable incomes are the key to higher deposit mobilisation by the banking system.
Income is most important determinant, both in the short run and long run, of decisions people take about making deposits. And, the interest rate matters for deposit mobilisation but only at the margin, the RBI study added.
The issue (slowdown in deposit growth) has attracted attention on reviving credit demand since November 2017. Bank credit growth rose to 9.3 per cent in November 2017 from an all-time low of 4.4 per cent in February, 2017, after a 75-month deceleration. The widening wedge between credit and deposit growth is triggering concerns about a structural liquidity gap in the system. This can throw “sand in the wheels of the financial intermediation process” through which deposits are converted into productive investments by way of lending, thereby greasing the wheels of the economy, it added.
There have been focus on the issue of the shortage of loanable funds. Also, the upside it has imparted to the cost of funds at a time when domestic economic activity appears to be losing momentum. The incoming data on high frequency indicators of demand and output is pointing to a slowdown in the economy.
Outstanding deposits of scheduled commercial banks (SCBs), at Rs 125.72 trillion as of March 31, 2019, accounted for 128.7 per cent of outstanding bank credit. This was lower than 132.5 per cent a year ago, reflecting the tightening of financial conditions on account of low deposit growth.
Bank deposits remain the preferred financial assets of households. They are the main sources of suppliers of funds to the economy. This is despite the emergence of alternative financial savings options with relatively high net returns (including tax incentives).
Interest rates matter only at margins in deposit mobilisation
Hasten economic growth rate for higher deposit mobilisation
Review tax sops for markets to boost deposits
Widening gap in credit deposit and growth raise concerns on liquidity gap