Bank deposits losing sheen as saving schemes gain

New Delhi: Global brokerage Goldman Sachs has flagged multiple headwinds to deposit growth in Indian banks as it loses its attractiveness. It has cited head winds like strained financial savings, the rise of alternatives such as stock market investments and strong growth in alternate government savings schemes (PPF and Small Savings), size of which has grown to 21 per cent of the total deposits.

Interestingly, increase in alternative government savings schemes is equivalent to 34 per cent of the increase in deposits over FY21-23, Goldman Sachs said. It said: “We believe the system would need to offer attractive rates to make bank-deposits attractive. We believe consumer lending is nearing the consolidation phase driven by large volumes of unsecured lending with an estimated 120mn unsecured personal loans which increased 4X over the last three years; rising financial leverage at Households with gross-financial-liabilities to gross-financial-assets increasing to all time peak of 40 per cent, a sharp reduction in net financial assets (financial savings minus financial assets) from 11 per cent+ of GDP to less than 5 per cent of GDP and deteriorating performance of portfolio on boarded over the last 12 months.”

Bank deposits also see competition from government small savings investments which have now grown to 20 per cent of the total deposit pool in the system, and offer higher interest rates compared to bank TD.

The share of deposits in the household financial asset mix has decreased to only 45 per cent in FY23 (compared to 48 per cent in FY21), with incremental flow of only 35 per cent going towards deposits. This has led to flows of net financial assets as a proportion of GDP to more than halve from FY21 to FY23, Goldman Sachs said.