Dipping deposits

As the banking sector faces declining deposits amidst rising NPAs and frauds, depositors are shifting to high-return alternatives, creating liquidity issues, while banks struggle with credit risks and financial instability

- KDP RAO

Even as the banking sector has been going through difficult times over the last few years due to huge NPAs, fraudulent practices and scams, now a new syndrome of decline in deposits has set in, this year, foreboding structural liquidity problems for the future. According to the RBI, by the end of the first quarter of 2024, when credit grew at 17.4%, deposits grew at 11.1% year on year, pushing the credit-deposit ratio to the highest levels in the last two decades. The contribution of CASA (Current Account Savings Account) has decreased from 43% last year to 39% this fiscal year, as depositors were lured by stock markets, mutual funds, or other high-return investment avenues.

Evidently, depositors who once found bank schemes safe and profitable are now moving to capital markets and other financial intermediaries, including mutual funds, insurance funds, and pension funds. A lot of fintech firms and financial companies are offering attractive high-return products with lower tax rates, making bank deposits an unwise option for investors. In response, banks have launched equally lucrative products at competitive prices. The result is a natural decline in deposits, as a paradigm shift has occurred in the narrative of savings and investments. Lower tax rates, higher returns, and flexibility in exit have become key determinants for individual and household savings, which normally contribute to a lion's share of bank deposits.