Banks, Deposits and Inflation

Banks, Deposits and inflation
The rate of growth of deposits of scheduled commercial banks has been on the decline for the past couple of years and concerns have been expressed on declining trend in deposits.
The reasons for the fall in deposit growth rate can be broadly attributed to unabated inflation , impact of the global financial crisis , lower GDP growth compared to the past trend , regulatory measures such as CRR, SLR , availability of alternate avenues of investment offering comparatively better returns than bank deposits and continued preference of people to have cash transactions. The deposit figures for the past few years are given below.
Deposit (Rs Crores)
2007-2008 31,96,939
2008-2009 38,34,110 (19.9%)
2009-2010 44,86,574p(17.0%)
P: provisional
The rate of growth of deposits is said to have further declined to around 15 % on a year on year basis as of 2nd July 30, 2010.
Source: RBI Bulletin –May 2010
The high level of inflation had entered into double digits in last February bringing down the real rate of interest and taking away depositors’ / Savers’ interest to save money with banks.
INTEREST ON DEPOSITS
Paradoxically, while the rate of inflation has gone up, the rate of interest on deposits has come down. The banks offer only 3.5 percent on savings deposits and between 6.5 percent and a maximum of 9 percent (for senior citizens) on long term deposits.
The Propensity to spend rather than to save money is very much visible among people. When inflation continues unabated, solution remains elusive and evasive, and with a vast majority of people struggling to make both ends meet, the savings will fall and banks’ deposits decline. Those who can afford to save even under high inflationary conditions will think of alternatives to protect their hard earned savings from erosion of value.
High inflation may perhaps be one of the reasons for increased demand for some of the consumer items as money spent today is more worth than to preserve and spend later.
PRESERVE VALUE OF WEALTH
Beside when other avenues of saving which offer a better return and hedge to fight inflation and preserve the value of wealth are available, the depositor- preference to bank deposits disappears.
Like banks people also have their own way of Asset – Liability Management and switch over to mutual funds, post office savings deposits, corporate deposits, real estate, capital market, gold and other commodities.
This reflects in a way improved financial literacy and better awareness of the availability of different markets and products. This should be a welcome signal from the angle of healthy competition and wider market to improve the financial system, although it has affected adversely the deposit growth of commercial banks.
CRR HIKES
The periodical increase in CRR though very essential as a monetary management tool to contain money supply and withdrawal of interest on the CRR balances ( payable over and above the 3 % minimum)have also been a cause for declining trend in deposits.
This, coupled with the minimum prescribed Investments under SLR and advances to preferred sectors which do not fetch attractive returns may be discouraging banks to mobilize deposits aggressively.
The general reluctance of banks to reduce their NIM from the present level of 3 and 3.5 percent because of various reasons also forces banks to offer lower rate of interest to depositors. Increasing non performing loans and additional provisional requirements towards bad debts compel banks to reduce expenditures mainly interest payment.
FINANCIAL INCLUSION
The concern expressed over declining deposits is justified and needs to be addressed. Financial inclusion (not only of the poor but also the well to do) is an immediate solution. Even in banked centres the exclusion is perhaps equal to inclusion, if not more.
Apart from rural and semi-urban centres, even in urban and metropolitan areas money lenders, chit fund and blade companies continue to thrive and survive well. Banks need to penetrate further to capture business and the opportunity should not be missed.
The easiest way to bring maximum people under the banking fold is to have a policy to ensure that all transactions above a cut off limit say Rs 5000 should only be by means of cheque and debit card. All real estate and gold related transactions above a cut off limit should be compulsorily routed through banks.
INFO-TECH
With the help of Information Technology, this measure can be easily complied with by proper tie-ups with concerned institutions. Minimum the cash transactions in the society the better for banks, public and all authorities. Fine tuning of all operations and increasing the turn over should help the banks to lower its NIM and offer better rate of interest to depositors.

(This article appeared in "The Hindu- Business Line" on 9th August 2010).

Dr.T.V.Gopalakrishnan