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As Finance Minister Nirmala Sitharaman holds a review meeting with heads of Public Sector Banks and Regional Rural Banks on Monday, the State Bank of India (SBI) in its latest report noted that the belief that the deposit growth in the banking sector is flagging is just a statistical myth. However, the report highlighted that, while it's true that <keyword id="19998083" type="General" weightage="20" keywordseo="credit-growth" source="keywords">credit growth</keyword> has outpaced deposit growth in recent years, leading some to trumpet this as a sign of decelerating deposit activity, a deeper analysis reveals a different story. The report highlighted that in FY23, the banking sector, particularly All Scheduled Commercial Banks (ASCBs), registered the highest absolute growth in both deposits and credit since 1951-52. Deposits grew by an impressive Rs 15.7 lakh crore, while credit expanded by Rs 17.8 lakh crore, pushing the incremental Credit-Deposit (CD) Ratio to a staggering 113 per cent. The momentum continued into FY24, with deposits rising by Rs 24.3 lakh crore and credit by Rs 27.5 lakh crore. Despite the narrative suggesting a slowdown in deposit growth, the data tells us otherwise. Since FY22, incremental deposit growth has actually outpaced incremental <keyword id="19998083" type="General" weightage="20" keywordseo="credit-growth" source="keywords">credit growth</keyword>, with deposits increasing by Rs 61 trillion compared to Rs 59 trillion in credit. "Decadal Deposits have expanded by a sharp 2.75 times, but Decadal credit expanded by 2.8 times since FY22, deposits expanded Rs 61 trillion vis-a-vis credit expansion at Rs 59 trillion," said the report. The report noted that the key issue at play here is not the quantum of deposits but the pricing. Historical trends have shown periods where credit and deposit growth diverge for 2 to 4 years. "The myth of a flagging deposit growth appears as just a statistical myth with credit growth outpacing deposit growth being tom-tommed as a deceleration in deposit growth" said the report. According to a Reserve Bank of India (RBI) study, as of June 2024, we are in the 26th month of this divergence, with predictions indicating that the cycle could end between June and October 2025. "The end of the divergence cycle could be June 2025 -October 2025" the report noted. The report also added that once this divergence ends, deposit growth is expected to pick up, while credit growth could slow significantly, signaling the beginning of a rate reversal cycle and a potential economic slowdown. Another noteworthy trend in the banking system is the decline in CASA (Current Account Savings Account) deposits. The report stated that the CASA deposits fell to 41.0 per cent in FY24 from 43.5 per cent in FY23, largely due to a decline in SB (Savings Bank) deposits. This decline, while somewhat aligned with pre-pandemic levels of 42 per cent, reflects a shift in how SB deposits are being used. Increasingly, SB deposits are being used primarily for transactional purposes, particularly UPI transactions, leading to greater movement across the banking system and raising concerns about the stability of SB deposits. Moreover, the rising returns on term deposits have been driving a significant compositional shift in bank deposits. The share of term deposits in total deposits has increased to 59.0 per cent in FY24 from 56.5 per cent in FY23, while the share of CASA deposits has continued to decline. The report said that this shift is a natural response to the increasing interest rate environment, as funds move from low-interest CASA accounts to higher-yielding time deposits. On an incremental basis, term deposits accounted for nearly 78 per cent of the total deposits in FY24, underscoring the impact of higher <keyword id="19950650" type="General" weightage="20" keywordseo="interest-rates" source="keywords">interest rates</keyword> on deposit behavior. In conclusion, while the myth of declining deposit growth may persist, the reality is more nuanced. Deposit growth remains strong, with term deposits taking a larger share of the pie as <keyword id="19950650" type="General" weightage="20" keywordseo="interest-rates" source="keywords">interest rates</keyword> rise. SEE ALSO: <a href="https://www.businessinsider.in/tech/mobile/news/google-pixel-9-pro-fold-launched-in-india-at-172999-but-you-cant-get-your-hands-on-it-right-now/articleshow/112517193.cms">Google Pixel 9 Pro Fold launched in India at ₹1,72,999, but you can’t get your hands on it right now</a> <a href="https://www.businessinsider.in/stock-market/news/ipo-scam-two-victims-from-hyderabad-lose-over-11crore-in-fake-ipo-scams/articleshow/112488051.cms">IPO scam – Two victims from Hyderabad lose over ₹11 crore in fake IPO scams</a> <a href="https://www.businessinsider.in/tech/news/indias-wearables-market-decline-for-the-first-time-as-smartwatch-shipments-fall/articleshow/112397246.cms">India’s wearables market decline for the first time as smartwatch shipments fall</a>

SBI report dismisses bank deposit concerns as a 'Statistical Myth'

The State Bank of India (<keyword id="19898108" type="General" weightage="20" keywordseo="sbi" source="keywords">SBI</keyword>) in its latest report has asked for <keyword id="20213295" type="General" weightage="20" keywordseo="tax-reforms" source="keywords">tax reforms</keyword> after concerns were flagged over the recent decline in <keyword id="20202062" type="General" weightage="100" keywordseo="bank-deposits" source="keywords">bank deposits</keyword>. The report says tax Reforms for Deposits can accentuate the banking system's stability and resilience to the next level. SBI attributed the fall in deposits to the varied rates of return offered by different <keyword id="20139443" type="General" weightage="20" keywordseo="investment-options" source="keywords">investment options</keyword> for similar time frames and different tax rates on <keyword id="22837794" type="General" weightage="20" keywordseo="returns-on-deposits" source="keywords">returns on deposits</keyword>. The <keyword id="20352499" type="General" weightage="20" keywordseo="SBI-report" source="keywords">SBI report</keyword> said that "<keyword id="20658792" type="General" weightage="20" keywordseo="tax-treatment" source="keywords">Tax treatment</keyword> of bank and non-bank channels are non-uniform, even as bank deposits have a wider and denser pass-through effect across the populace sensitivity of Deposits on Tax is as much as 7 per cent" The report noted that a bank deposit of Rs 10 lac in a Savings Bank (SB) account at an investment return of 3 per cent would generate Rs 30,000 in returns and after accounting for taxes and exemptions, the <keyword id="22837795" type="General" weightage="20" keywordseo="net-return" source="keywords">net return</keyword> would be Rs 16,000. The report adds that the net returns vary significantly if deposits are made in different instruments like <keyword id="21041176" type="General" weightage="20" keywordseo="term-deposits" source="keywords">term deposits</keyword>, short and long-term investments in debt funds, liquid funds or bonds. The tax rates on these deposits also favour saving banks or term deposits. The report illustrates a term deposit of up to one year with the same principal amount of Rs 10 lac at a yield of 6.25 per cent would result in a net return of Rs 50,000 after taxes. But for term deposits exceeding one year the interest rate is higher and with an interest rate of 7.25 per cent, the gross return would be Rs 72,500. After taxes, the net return would be Rs 58,000. The data highlights that similar type of investments for the same period generates significantly different returns because of different tax treatment by the government. Similar variations are observed in other <keyword id="20105084" type="General" weightage="20" keywordseo="investment-plans" source="keywords">investment plans</keyword> as well. For instance, investments in equity and mutual funds with a 2 per cent dividend income of Rs 10,00,000 generate Rs 20,000, which after taxes the net return is Rs 16,000. However, Short-term investments of less than one year in equity and mutual funds, offering an 11 per cent return generate Rs 1,10,000, with a net return of Rs 88,000 after taxes. This investment if made in Long-term investments of more than one year the return increases to 15% on Rs 10,00,000 and generates Rs 1,50,000 annually. With a lower tax bracket of 12.5 per cent tax on long-term investments and applicable exemptions, the net return is Rs 1,43,750. These variations in returns across different deposits and investment options highlight the complexity and thus investors are choosing the higher return options over the bank deposits which in turn poses a threat to the deposit growth in the banking sector.

Decline in bank deposits because of non-uniform tax treatment on various investment options: SBI report

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SBI report dismisses bank deposit concerns as a 'Statistical Myth'

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Decline in bank deposits because of non-uniform tax treatment on various investment options: SBI report

ANI

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