Thursday, 4 December 2014

Bank Deposits Down- A Trend, or Lasting Reality?

In recent times, banks are reporting a steady decline in deposits from customers across the economic scale. This is obviously a worrying factor, not helped by the fact that many reputed Indian banks including State Bank of India (SBI), Punjab National Bank (PNB), Bank of India (BoI) etc. have, recently, slashed the interest rates across a wide range of fixed deposit maturities. Is this the start of a mass trend? Have the banks lost their charm as a safe and productive outlet for an individual’s hard earned money, via instruments like the fixed deposit?

Is this time to safely relegate the erstwhile superstar that was the fixed deposit as a relic from the days gone by?

Not so fast, dear investor. The warning bells and the doomsday predictions will have to wait a while longer.

Rising Cost of Living (Money is Short- Commitments Are Many)
With modernisation and all-round advancements, the cost of living has correspondingly hit the roof. The common Indian man now needs to stretch his hard earned rupee much farther than before. When expenditure eats up most of the income, savings turn into a luxury rather than a rule. In August 2014, bank deposits across India grew at an alarming rate of just 5.6%- the lowest in the preceding five years, signalling and providing ample proof for this hypothesis. This worries those in the banking trade because deposits from individuals account form a majority of such monetary inputs- 36% as compared to 34% deposited by businesses annually.
The solution- can the cost of living scale down in the coming times? Maybe Santa Claus could do something about it…

Shifting Priorities- A House, Car, and maybe World Peace!
For common households, the first priority when it comes to disposable cash is a roof over their heads- which translates into housing loans and mortgages. Next, the common man looks for other necessities in life, a car, education for the kids, implements for the house etc. This allots a very limited margin for sustainable and undisturbed bank deposits, a fact made difficult by the rapid urbanization of the Indian middle class. Money is short- and it serves a greater purpose when not locked in a bank. The fact that home loans, car loans are holding steady feeds to this idea.

It’s a Viral Epidemic- Impacting Other Deposit Instruments
The slowdown in bank deposits has had a natural escalation- other products in the bank’s kitty, including current accounts and savings accounts are feeling the pinch. These products are the bank’s primary and cheapest form of funding, that have risen at a mere 5.1% in August 2014. The concern arising from this is that as loan growth is a much higher prospect than the growth of its cheaper forms of funding, the banks might have to dip into their expensive forms of cash to power their loan growth. It’s like cigarette smoking- the end results are never good, cumulating in such scenarios as a slower lending growth.

Negative Real Returns on Deposits- Bad gets Worse!!
This year, inflation has maintained a steady height across the 12-month fixed deposit rate, resulting in among other things, cut-down on the real returns on deposits. Next year, the situation is expected to get worse, surpassing the 3.3% inflation rate set in August 2014. This will ensure that returns on deposits will not meet the expectations of the investor, forcing them to invest in other high-yielding formats including trusts, stock market etc. The situation looks grim for the bank deposit scenario, and all the banking analysts who are hoping for a ‘poof-and-the-problem-is-history’ solution.

Hence, while the bankers search for an answer to this nagging problem, the common folks are holding on tight to their monies and looking out for more productive results. Understandably, the one solution that could ease the worries at both ends could be the lowering cost of living, an option that only a progressive and people oriented budget can confirm upon. The wait, begins!!

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