According to a survey, the sudden spike in bank deposits over the past few months is due to a rise in overall borrowing by both central and state governments and not to an increase in savings.
In January-May 2020, aggregate bank deposits in the banking system increased by Rs 7.05 lakh crore compared to 4.65 lakh crore in the same period last year. In January-May 2020, however, bank credit grew by only Rs 2.2 lakh crore, compared with 2.84 lakh crore in January-May 2019.
“The sudden surge in bank deposits is due to a rise in overall borrowings of both the central and state governments, rather than increased savings,” the report said. It added that while the accretion of deposits was strong, a shift in the profile of banks accruing them is noticed with depositors focusing on quality and security to distinguish between banks.
Among its rated banks, AAA-rated lenders have witnessed a rise in the rate of accretion of bank deposits in the fourth quarter of 2019-20, both quarter-on-quarter and year-on-year, while new-age private banks, regional banks and small finance banks (SFBs) have mostly slowed.
“This has created a divide in the banking segment deposit rates,” it said. While virtually all banks have lowered their deposit rates, the fall in the public sector and large private sector banks is much sharper, creating a broader gap between the top banks and others.
The deposit rate differential also reflects the wide gap in these banks’ marginal cost of lending-based rates (MCLRs), which will help to obtain better loans while maintaining their margins once credit demand picks up, it said.
“Lesser flexibility in terms of attracting deposits at lower rates implies that small and low-rated banks will either face the challenge of sacrificing margins to compete with large banks or have to on-board low rated customers which will increase their risk profile,” the agency said.
It said the distinguishing factors in the country’s banking system for bank deposits accruals are — franchise, regional distribution (branches), rate of interest provided, the effect of technology and customer segmentation, and business orientation.
Traditionally, banks competed on the level of a franchise, geographic spread, and customer service to accrue deposits, but with the emergence of new-age private banks and SFBs, factors such as the interest rate offered, technology, and digital offering and customer service have become increasingly important.
“Banks with large operations, strong retail and granular current and savings account profile would continue to gain bank deposits in the near term at the cost of other private banks as the redistribution of deposits could continue,” it said.
The agency further said the puzzling fact is that despite a massive rise in cash circulation, which is leakage in the bank deposits base, the deposit growth has been robust.
Following the nationwide lockdown that stalled most of the economic activities, cash in circulation increased sharply in the first five months of 2020 by around 3.5 lakh crore, the highest in the last two decades (2017 barring re-monetization period).
The report said that this was mostly due to the precautionary holdings at the bottom of the pyramid of cash and government disbursements