Worst deposit crunch in 2 decades, RBI urges banks to explore new ways to increase deposits

Banks are experiencing significant difficulties in raising deposits to extend loans. As demand for loans increases and deposit growth stagnates, the gap between loan and deposit growth is widening. Consequently, the credit-to-deposit ratio in the banking system has reached its worst level in two decades, raising concerns for the RBI.

RBI cracks whip on banks to ‘think unique’ on how people save

According to RBI data from June 28, deposits grew by 11.1% on a year-on-year basis, while loan growth stood at 17.4%. RBI Governor Shaktikanta Das has urged banks to think outside the box to increase deposits and adopt new strategies to achieve this.

Since March 2020, the share of savings account deposits in total bank deposits has decreased from 32.8% to 31.2%, while the share of fixed deposits has increased from 57.8% to 59%. This trend indicates that people are moving their savings from savings accounts to options like fixed deposits (FDs) and mutual funds, which offer better returns.

Previously, banks attracted customers to increase deposits by raising interest rates, but now some banks have altered their strategies.

According to media reports, Kotak Bank has strengthened its franchise base to increase deposits. They have simplified the process of opening savings accounts and offered various bundling promotions in different sectors.

HDFC Bank is expanding its branch network to increase customers, focusing on small deposits rather than large-ticket sizes. Since January last year, Yes Bank has opened 140 new branches and plans to open 50 more this year. RBL Bank is also working on several measures, including increasing interest rates, to grow its customer base.

Trends show shift from savings to FDs, MFs

SEBI-registered investment advisor Jitendra Solanki says that equities and mutual funds have provided excellent returns over the past few years. This led to people in shifting their savings from banks to the stock market and mutual funds. Another major reason for the stagnation in deposit growth is the higher tax burden on FDs compared to equities. With inflation above the RBI’s target, there is no expectation of a reduction in interest rates from the RBI anytime soon. Therefore, banks might have to increase FD interest rates to boost deposit growth.

If you are planning to invest in FDs, do some homework. Banks might raise FD interest rates to improve the deposit-to-credit ratio. So avoid putting all your money in one FD at once. Currently, several banks, including the largest government bank SBI, are offering an annual interest rate of 2.7% on savings accounts. This is quite low compared to the 5% retail inflation rate. As a result, savings accounts are offering a negative return, making it unwise to hold large amounts in such accounts.