MORE and more individual savers are preferring the government’s small savings schemes to bank deposits, a trend that could make it difficult for banks to meet their business targets.
According to projections made by the central bank in the October monetary policy, bank loans would grow 16% while deposits would rise 18% during the current fiscal. For this to happen, banks will have to lend almost Rs 130,000 crore by March, and mop up Rs 161,000-crore deposits.
The latest figures released by RBI show a 13.8% growth in deposits as banks have raised fresh deposits of Rs 529,221 crore between April 2009 and February 2010. The growth is lower than 16.8% recorded between April 2008 and February 2009. This is reflected in the sharp slowdown in term deposits of most banks. Fresh term deposits raised between April 2009 and February 2010 is Rs 483,653 crore, which is Rs 97,000 crore less than what they raised during the same period of the previous financial year.
Bankers attribute the slowdown in deposits to decline interest rates in the current financial year. “Interest rates offered by banks are very low compared to that offered by small saving schemes of the government. Thus there is very little interest to invest in bank-term deposits,” said Andhra Bank CMD RS Reddy. Small savings scheme offer 8% while banks’ offer around 6.5-7.5% on term deposits.
Also, there has been a conscious effort by many banks to slow down deposits mobilisation with loans failing to pick up. According to Bank of India executive director M Narendra, banks have not aggressively pushed for deposits this year because of a slowdown in credit offtake. “At the same time, there is a shift towards small savings scheme. But from the macro point of view, there may not be an impact on the overall savings rate,” he said.
Banks have been progressively reducing the return on term deposits since November 2008. Peak interest rates on a five-year term deposit has come down from 10% in 2008 to below 8% now. This has resulted in a shift of savings from banks to other avenues, including small savings
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schemes such as post office monthly deposit schemes, National Savings Certificates and the Public Provident Fund (PPF). The interest rates on these schemes are fixed by the government and are capped at 8% for most of the schemes. Compared with bonds issued by the government, the small savings schemes are a more expensive form of borrowing.
Finance ministry data also indicate a surge in money flow into these schemes. Fresh mobilisations through savings certificates and deposits from April 2009 to January 2010 amounted to Rs 28,638.81 crore compared with outflows of Rs 13,816.49 crore in the year-ago period. A fresh inflow of Rs 11241.28 crore into PPF — another popular scheme — has come this year against Rs 196.90 crore in the year-ago period.