India’s bank deposit slump: Time for radical new ideas?

livemint.com:

Indian regulators and policymakers have amplified their call for banks to become innovative in raising deposits. This low-cost source of funds is trailing the pace of bank lending, and if credit-deposit gaps persist, lenders would either need to rely more on costlier sources or go slow on credit, which could drag the growth of our economy back. Over the weekend, finance minister Nirmala Sitharaman exhorted banks to pre-empt such a scenario.

A similar appeal was made by Reserve Bank of India (RBI) Governor Shaktikanta Das. The Economic Survey has also flagged the problem. In 2023, credit grew by almost 16%, while deposits went up around 13%.

In previous years, the gap was larger, except for a pandemic blip of depositors piling up money in their accounts while loans got disrupted. In 2022, for example, credit grew nearly 15%, but deposits rose by less than 10%. This trend can partly be blamed on the repressively low rates of interest that depositors got for an extended stretch, even as the concept of ‘real’ returns—after taking inflation into account—gained traction at the retail level.

Frustrated households had no qualms shifting their savings to capital markets, nudged along by a stock-market bull run and easy-swipe apps for share trading on mobile handsets. Today, hikes in deposit rates by banks look too tiny to lure depositors back. Another deterrent was a tax regime that favoured debt funds over bank deposits by offering the former not just indexation benefits, but also a light burden on long-term capital gains.