Deposit growth trailing credit? It's a 'statistical myth', say SBI economists

Concerns on trailing deposit growth are a "statistical myth", as the overall quantum of deposits has outpaced credit since FY22, economists at the State Bank of India (SBI) said on Monday (August 19).

In a report, they said that nearly half of the term deposits in the system are held by senior citizens, stating that the younger population is seeking other higher-yielding avenues.

The economists pitched for changes in tax treatment on deposits so as to help banks' larger flows to help with the credit growth. The absolute quantum of deposit growth since FY22 stands at Rs 61 lakh-crore, which is higher than the Rs 59 lakh-crore of credit growth, they added.

Concerns over wedge

"The myth of a flagging deposit growth appears as just a statistical myth with credit growth outpacing deposit growth being tom-tommed as a deceleration on deposit growth," the report said.

It can be noted that for over one year, concerns are being expressed about the wedge between deposit and credit growth, which has led to questions around the sustainability of credit growth in the absence of sufficient deposit accretion.

In this 'war for deposits', banks have been forced to raise interest rates which has hurt their profitability with lower net interest margins, and also resorted to alternatives on liability management like commercial paper and certificate of deposits.

In the report, SBI economists acknowledged that in FY23 and FY24, the growth of deposits did trail credit, at Rs 24.3 lakh-crore and Rs 27.5 lakh-crore, respectively.

Slower deposit growth

The Indian banking system is in the 26th consecutive month of slower deposit growth, the report said, adding that historically, there have been such episodes of deposit growth trailing credit growth which lasted 2-4 years.

The current divergence cycle could end between June and October 2025, the economists said, based on their expectations on past experience, and hinted that credit growth may slow down in the interim period.

Additionally, with the new guidelines on liquidity asking banks to keep wider buffers may lead to a short-term slowdown in credit growth, they added.

The report said the saving account balances are held only for transactional purposes, resulting in the decline in the low-cost current account and saving account balances for the banks, while even in the case of fixed or term deposits, there is a move away from banks to other high-yielding alternatives.

Call for tax changes

"Remarkably 47 per cent of term deposits are now held by senior citizens, implying the younger cohort is increasingly shying away from traditional avenues like bank deposits," the SBI report said, pitching for a change in tax treatment on deposits.

"In line with MF (mutual funds)/equity markets, we are of the considered opinion that the government should tweak the 'tax on interest on deposits and delink tax treatment at the highest income bucket.... and tax treatment should be at redemption and not at accrual basis for bank depositors," it said.

Tax has a net impact of 7 per cent on deposits of banks and there is a need for "sincere thinking" on treating deposits uniformly as a different asset class, it said, adding that a uniform tax treatment like a short and long term will have minimal impact on government revenues.

Low-cost deposits

The state-run lenders have been more active in tapping into the low-cost deposits, the report said, adding that the average ticket size of savings/term deposits of Public Sector Banks comes to Rs 72,577, as against Rs 1.60 lakh for private sector banks and Rs 10.5 lakhs for foreign banks.

With agency inputs