Bank deposits in India have been trending down since Financial Year 10, falling off to sub-10% over the past one year from an average of 17% over FY09 13 and 12% over FY13 16. This is surprising since excess deposit inflow in the wake of demonetisation was estimated to be Rs 2.8 4.3trillion (implying excess growth of 3.0 4.7%). More importantly, the significant reduction in term deposits (particularly retail term deposits) to sub-5% over the past three years despite real interest rates being at one of the highest levels is a cause for concern. Analysis of term deposit inflow during the DeMon period suggests larger inflow of term deposits with maturity less than one year or in the form of savings deposit. This, in turn, suggests the trend of abnormal growth would have been normalised by now.
Is this downtick structural, cyclical or technical?
Decoding the financial savings trend reveals that slowing deposit growth is not only on account of technical or cyclical factors, but also due to following structural reasons:
# 1) Transformation in the behaviour of Indian households from savings-focused loan-averse investor to consumption-focused leveraged consumer. In fact, rising awareness about and potentially higher returns on other financial savings/investment products are effecting a tectonic shift in the savings pattern at the expense of bank deposits.
# Cyclically, nominal GDP growth has been on a decline leading to a similar trend in deposit growth as well.
# Besides, amid tight liquidity, upcoming elections and rural spending, deposits are being diverted, which is increasing the currency in circulation.
Deposit growth correlated to nominal GDP growth
Trend for the past 20 years suggests a strong correlation between deposit growth and nominal GDP growth. This is along expected lines given better income profiles and a business upcycle during a phase of high economic growth improves the savings pool as well as demand for money, and vice versa. One of the key reasons attributed to deceleration of deposit growth since FY10 is the continued decline in nominal GDP growth. Passive corporate activity levels and stretched working capital cycles have led to lower accretion in current accounts and wholesale deposits in the past seven eight years.
Structural indicators Are Indians saving enough?
The growth in household disposable income has lagged nominal GDP growth (down to 72% of GDP in FY18 from 77% in FY12). Besides, there s a structural transformation in the behaviour of Indian households from savings focused loan-averse investor to consumptionfocused leveraged consumer. This trend is reflected in the falling proportion of financial savings restricting the flow of household money into financial instruments.
Given rising awareness about other investment products, improved traction is visible in pension schemes, mutual funds and life insurance. And this change in the savings pattern is happening at the expense of bank deposits. Drilling down further, we find that banks are incrementally becoming more of a transactional avenue and less of savings destination given the low differential between savings rates and term deposits. This explains the outsized growth in savings deposits vis-a-vis retail term deposits.
(Edited extracts from Edelweiss Securities report)