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24
October 2016
With falling bank deposit rates
hitting time deposits hard, people are turning to financial instruments like
shares, mutual funds, debentures, currency and tax-free bonds for higher
returns, says the Reserve Bank of India (RBI). The Total Investment
& Insurance Solutions
Stakeholders feel the trend would
continue and the bankers would be up against more competition from relatively
high-yielding financial instruments in garnering deposits as long as the
low-deposit-rates regime persists. The Total Investment & Insurance
Solutions
"Time deposits were muted by
the moderation in deposit rates (both nominal and real). Large issuances of
long-term tax-free bonds by various public sector units contributed to the
deceleration in deposits, besides the higher returns on small savings which are
not subject to tax deduction at source (TDS). The Total Investment
& Insurance Solutions
"As a result, scheduled
commercial banks' (SCBs') deposits decelerated to 9.3 per cent in 2015-16, the
lowest since 1963-64," said RBI's latest Annual Report.
Despite the downslide, the ratio of
the households' net saving to gross national disposable income increased in the
last fiscal because of the savers' appetite for other financial assets.
According to the RBI report, the
household net financial savings rate increased to 7.7 per cent of gross
national disposable income (GNDI) in 2015-16 from 7.5 per cent in 2014-15 and
7.4 per cent in 2013-14. The Total Investment & Insurance Solutions
"The improvement reflected a
higher rate of increase in gross financial assets in relation to that in
financial liabilities (loans etc). The increase in gross financial assets was
driven primarily by a turnaround in small savings and increases in investment
in equities and mutual funds, tax-free bonds by public sector units and
currency holdings even as the growth in bank deposits held by the households
moderated," the report said.
The growth of deposits has been a
challenge for the banking system in the recent past, with other alternatives
providing higher returns. The Total Investment & Insurance
Solutions
"The moderation in systemic
deposit growth (like recurring and fixed deposits) can also be partly
attributed to the slowdown in credit off-takes. Many of them (banks) have
sharply reduced their bulk or high cost deposits over the last year as they
attempted to protect their profitability," ICRA Ltd's Senior VP, Financial
Sector Rating, Karthik Srinivasan, told IANS.
But bankers say muted deposit growth
is not a "worrying factor" unless and until credit flows increase. The Total Investment
& Insurance Solutions
"Moderation in deposit growth
would not be a worrying factor for banks until credit growth picks up. If
credit demand increases, banks would require more resources and only then could
they consider increasing the deposit rates. At present bankers are looking to
push up credit growth," Bandhan Bank Managing Director and CEO Chandra
Shekhar Ghosh told IANS.
According to RBI data, households'
financial assets as bank deposits grew only 3.8 percent in 2015-16 over the
previous year. In contrast, households' assets in currency increased by 49.54
percent in the last fiscal. In shares and debentures, such assets soared by a
whopping 72.25 percent in 2015-16 over the year-ago period. The Total Investment
& Insurance Solutions
According to the Association of
Mutual Funds in India, the mutual fund industry's asset under management (AUM)
has more than doubled in the last four years from Rs 5.87 trillion as on March
31, 2012, to Rs 12.33 trillion as on March 31, 2016.
Further, market capitalisation has
grown manifold.
The Total Investment & Insurance Solutions
"The market has around 13 crore
investors and has grown multiple times in the last 10 years. Of late, the
market has got a few products which are well researched, small ticket and
retail savvy," a National Stock Exchange spokesperson told IANS.
So long as the deposit rates remain
low, alternative instruments like mutual funds, pension funds, insurance, bonds
and equities will breathe down the banks' neck in resource mobilisation.
"Over the medium term, the
banking system would face greater competition from alternate channels in
mobilising deposits," Srinivasan said. The Total Investment
& Insurance Solutions
But experts said India being a
bank-driven economy, the slowdown in the growth of deposits is a concern as
access of funds to productive sectors could get curtailed.
However, banks are still perceived
to be a safe avenue to park excess funds and consequently, if banks were to
increase the deposit rates, the inflows would go up, he said.The Total Investment
& Insurance Solutions
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