Economists at the State Bank of India (SBI), the country's largest lender, have dismissed concerns about trailing deposit growth as a "statistical myth". Their report, released on Monday, reveals that the total volume of deposits has surpassed credit growth since the financial year 2022.
The report highlights that nearly 50% of term deposits are held by senior citizens, while younger individuals are opting for higher-yielding investment avenues. To address this shift and support credit growth, the economists have advocated for changes in the tax treatment of deposits.
Since FY22, the absolute increase in deposits has reached Rs 61 lakh crore, outstripping credit growth which stands at Rs 59 lakh crore. "The myth of slowing deposit growth is merely a statistical illusion, with claims of credit growth exceeding deposit growth misleadingly presented as a deceleration in deposit growth," the report states.
Concerns about the disparity between deposit and credit growth have persisted for over a year, raising questions about the sustainability of credit growth without sufficient deposit accumulation. This 'battle for deposits' has led banks to raise interest rates, negatively impacting their profitability due to lower net interest margins. Banks have also turned to alternatives such as commercial paper and certificates of deposit for liability management.
The SBI report acknowledges that in FY23 and FY24, deposit growth has lagged behind credit growth, at Rs 24.3 lakh crore and Rs 27.5 lakh crore respectively. The Indian banking sector has experienced 26 consecutive months of slower deposit growth, though such patterns have historically lasted between two to four years. The current divergence is expected to end between June and October 2025, with a potential slowdown in credit growth during the interim.
New liquidity guidelines requiring banks to maintain wider buffers may also contribute to a short-term slowdown in credit growth. Additionally, the report notes that savings account balances are primarily used for transactions, leading to a decline in low-cost current and savings account balances. There is also a noticeable shift away from traditional bank deposits to higher-yielding investment options.
The report points out that 47% of term deposits are now held by senior citizens, indicating a trend of younger individuals moving away from traditional bank deposits. The economists have called for tax reforms, suggesting that deposit tax treatment should be aligned with mutual funds and equity markets. They propose taxing interest on deposits at the point of redemption rather than accrual, which would address the current 7% tax impact on deposits.
Public sector banks have been more active in attracting low-cost deposits, with the average ticket size of savings and term deposits at Rs 72,577 for these banks, compared to Rs 1.60 lakh for private sector banks and Rs 10.5 lakh for foreign banks, the report adds.
Follow us
