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30
January 2019
 |
Bank
(The Total Investment & Insurance Solutions)
The
government has increased its borrowing from the National Small Savings Fund
(NSSF) due to the large interest gap between bank deposits and small saving
rates. However, this may make it difficult for banks to reduce deposit rates
and hence lending rates in near future, says a research note from State Bank of
India (SBI).
The
report authored by Dr Soumya Kanti Ghosh, group chief economic adviser, SBI,
says, "Interestingly, in the last few months, with bank deposit growth
significantly lagging bank credit growth, banks have been increasing deposit
rates to protect the possibility of deposit flight from banks. Such widening
gap between deposit and credit growth requires banks to manage liquidity by
focusing on deposit growth. Thus, it is imperative that we make bank deposits attractive
by making it tax free."
The gap
between the small saving interest rate, which is average of public provident
fund (PPF) and Sukanya Samridhi accounts rate and average bank term deposit for
a tenure of less than one year still remains around 98 basis points (bps).
For the
current FY2019, the government had a buyback target of Rs71,941 crore and
switch of Rs28,059 crore. The government has also dipped into small saving
scheme to meet a part of its expenditure. "This has been in line with the
trend observed in the past few years. This also helped keeping the bond yields
in check by keeping interest rates low, simultaneously managing liquidity in
the market," SBI says.
As
against the budgeted amount of Rs75,000 crore, which was later revised to Rs1 lakh
crore, borrowings through small savings have reached Rs45,396 crore by November
2018. For FY2018, the government had completed the scheduled borrowing of
Rs1.02 lakh crore through small savings scheme.
At the
same time, during the fortnight ended on 4 January 2019, the aggregate deposits
have registered a growth of 9.9% or Rs10.85 lakh crore while advances have
increased by 14.5% or Rs11.85 lakh crore, the report points out.
According
to SBI, such widening gap between deposit and credit growth requires build up
of liquidity, which has to be met through the banking channel since in the
event of no buyback of securities and Reserve Bank of India (RBI) not doing
aggressive open market operations (OMOs), the banks would have to manage
liquidity by focusing on deposit growth.
"The
next year, may therefore see a hardening of interest rates. The huge redemption
pressure may lead to liquidity squeeze and therefore, the government would have
to go for switching of securities for longer term ones, which is the only
option foreseeable at the present juncture, in the absence of buyback," it
added.The Total Investment &
Insurance Solutions
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