Banking Sector Struggling with Slower Growth

What’s in today’s article?

• Why in News?
• Analysing the Weak Deposit Growth in the Banking Sector
• Concerns Over Slowing Bank Deposits and Efforts to Boost Them Up

Why in News?

• According to the latest data from the Reserve Bank of India (RBI), the banking sector has been struggling with slower growth in deposits compared to credit over the past few months.
• As the gap increases between deposits (which customers keep with the bank and get interest for) and credit (which the bank lends to customers at an interest rate charged from them), it creates an asset-liability mismatch for lenders.

Analysing the Weak Deposit Growth in the Banking Sector:

• Higher credit-deposit gap:
  • In the quarter that ended in June 2024, bank deposits stood at 11.7%, while the bank credit growth stood at 15%, pointing to a higher credit-deposit gap.
  • The widening gap has concerned the government and the RBI, who have asked lenders to focus more on deposit mobilisation through innovative products.
• Major reasons for a slower growth in deposits:
  • The outflow of household savings from banks to capital markets is one of the major reasons for a slower growth in deposits in the banking system.
  • After the Covid-19 pandemic, the Indian capital markets have seen a surge in retail activity through direct (direct trading) and indirect (using mutual fund route) channels.
  • As per the Economic Survey 2023-24, the number of demat accounts with both depositories (NSDL and CDSL) rose from 11.45 crore in FY23 to 15.14 crore in FY24.
• What has facilitated outflow of household savings from banks to capital markets?
  • Higher returns, robust digital infrastructure and rapid smartphone penetration (which have eased the investment process) have facilitated the entry of more retail investors into capital markets.
  • A rise in retail participation was more substantial through the indirect channels via mutual funds, insurance funds and pension funds.
  • For example, the net AUM (assets under management) of the mutual fund industry grew by 6.23% to touch a record high of Rs 64.97 lakh crore as of July 31, 2024.
  • The mutual funds segment presently has about 9.33 crore systematic investment plan (SIP) accounts through which investors regularly invest in schemes.

Concerns Over Slowing Bank Deposits and Efforts to Boost Them Up:

• Concerns:
  • While bank deposits continue to remain dominant as a percentage of financial assets owned by households, their share has been declining.
  • This trend has led to concerns that banks are increasingly relying on more expensive funding sources like Certificates of Deposit (CDs), which could impact their profitability.
  • Also, the slower deposit growth compared to credit may potentially expose the system to structural liquidity issues.
• Efforts to boost bank deposits:
  • To meet the systemic credit demand, banks are trying to raise capital through innovative initiatives such as special deposit schemes.
  • For example,
    • SBI launched ‘Amrit Vrishti’, a scheme that offers 7.25% interest on deposits for 444 days.
    • Bank of Baroda also launched the ‘Monsoon Dhamaka’ deposit scheme, offering interest rates of 7.25% for 399 days and 7.15% for 333 days.
• Outlook:
  • For the current financial year, deposit tightness is likely to persist, despite banks' efforts to strengthen their liability franchise.
  • The banking industry in India is working hard to strike a delicate balance between continuing to support robust loan growth and charging higher interest rates for deposits, which will probably keep banks' cost of funds high.

Q.1. What is a systematic investment plan (SIP)?

A SIP is a disciplined way of investing money regularly in a mutual fund. SIPs are similar to recurring deposits and are a popular way to invest in mutual funds in India.

Q.2. What is National Securities Depository Limited (NSDL)?

NSDL is an Indian central securities depository, based in Mumbai. It was established in 1996 as the first electronic securities depository in India with national coverage.

Source: Why banks are under the gun to beat mutual funds and emerge out of a big threat

IE