State Bank of India and other public sector lenders are requesting the government to allow them to offer incentives in order to increase deposits. The decline in deposits has had a negative impact on credit flows.
In the fiscal year 2024, banks experienced lower deposit growth compared to the increase in credit, leading them to bridge the funding gap through higher-cost Certificates of Deposit (CDs).
Banks have brought this slowdown in deposits to the attention of senior government officials. One proposal is to reduce the lock-in period for tax-saving fixed deposits from five years to three years, according to a senior bank executive familiar with the matter.
Bankers have pointed out that investors are favoring equities, mutual funds, and tax-saving equity-linked savings schemes (ELSS) due to their higher returns, rather than tax-saving fixed deposits (FDs). All of these tax-saving schemes currently have a lock-in period of five years.
Bankers believe that reducing the lock-in period for tax-saving fixed deposits to three years will help address this imbalance.
In the fiscal year 2024, aggregate deposits grew by 12.9% compared to a 16.3% increase in bank credit, as investors sought alternative avenues to invest their money.
The proportion of deposits in the gross financial savings of households decreased from 6.2% of gross national disposable income (GNDI) in fiscal year 2021 to 4% in fiscal year 2023, as savings shifted towards equities and other investments. Over the same period, investments in shares and debentures increased from 0.5% to 0.8%. “Due to the excitement in the Indian stock markets, investors have leaned more towards them, which has affected deposit growth,” explained another bank executive.
According to data from the Association of Mutual Funds in India (AMFI), the industry’s assets under management (AUM) more than doubled to ₹57.26 lakh crore on April 30, 2024, from ₹24.79 lakh crore on April 30, 2019.
Banks argue that a healthy credit-deposit (CD) ratio, which measures liquidity, is necessary to finance the economy and large infrastructure projects. Based on the latest available data, the CD ratio has generally remained around 80% since September 2023, compared to 75.8% in fiscal year 2023.