Slow income growth impending deposit growth: RBI study

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Decelerating income growth is the most important among the factors responsible for the slowdown in deposit mobilisation of the banking system, the Reserve Bank of India (RBI), in its recent study, said.

The co-movement of deposit growth with the growth of nominal GDP is stronger than with the deposit interest rate, as per the study. Small savings collections emerge as the next most important determinant, suggesting that in the long-run, income drives both deposits and small savings, and the limit on tax incentives for small savings enables households to undertake both out of their income.

Outstanding deposits of scheduled commercial banks (SCBs) stood at `126 lakh crore as on March 31, 2019 accounted for 128.7% of outstanding bank credit (lower than 132.5% a year ago), according to the RBI.

However, deposit growth is picking up in recent months in a cyclical upturn since December 2018, which is overwhelming a trend slowdown that has been underway since October 2009. Aggregate deposits in banking system have been growing 8-10% year-on-year since the beginning of FY19, marginally higher than its 15-year trend.

Similar to Sensex return, small savings substitute bank deposits in the short-run but supplement deposits in the long-run, reflecting that limits on income tax exemption eventually evens out substitution effects and allow income to be the key determinant of both in the long-run.

Besides income, assured returns, liquidity and safety are also the factors that impinge upon households’ choice of financial instruments. Consequently, there has been growing popularity of mutual funds and other stock market instruments.

Pattern of aggregate deposit growth is predominantly determined by the behaviour of time deposits, as they contribute 88% to the total deposits in banks.

Returns on the Sensex, inflation and the interest rate on public provident funds (PPF) have been found to negatively impact the growth of time deposits.

The RBI study reveals that income and financial inclusion are long-term structural drivers while the interest rate and Sensex returns impact deposit growth in the short-run.

The study has also focused on changes in deposit behaviour due to demonetisation’s channelisation of financial savings to capital markets, and the shifts it induced in households’ preferences from term deposits to savings deposits.

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