Declining Bank deposits - Reasons & Remedy ?

What do Finance Minister Nirmala Sitharaman, Reserve Bank of India (RBI) Governor Shaktikanta Das, and Financial Services Secretary Vivek Joshi have in common? All three are concerned about the slow deposit growth in the banking sector. The industry is facing one of its toughest challenges in raising deposits to keep up with credit growth. As of July 26, the deposit portfolio of all scheduled commercial banks stood at Rs 211.93 trillion, while credit reached Rs 168.14 trillion. So far this financial year, deposit growth has been 3.5 per cent, compared to a 2.3 per cent increase in credit.

The declining trend in deposits is consistent for a while now and has caught attention of RBI governor and even FM has taken a note of it. So what's going wrong for the RBI. Seems nothing is working for the banking industry right now. 

ANALYSIS AND VIEWS :

Already the returns on bank deposits are lesser than inflation and interest income is also taxed further reducing the returns. Much awaited REPO rate cuts will reduce returns on the FDs. Hence people are switching to mutual funds in anticipation of higher returns. Bond Market is also increasing and gives better returns. 

Month on month, SIP inflows are getting higher and higher. Indian investor community has stopped investing in traditional methods of FDR and RDs. Significant amount of Bank deposits are being shifted to mutual funds. Considering overall bullish sentiment, AMCs are also bringing in more NFOs taking additional bulk investments, which again are being routed from bank deposits.

If at all this wasn't enough, banks are focusing on the cross-selling products and main focus is on the insurance policies be it traditional or ULIPs, once a HNI enters bank branch, he won't come out before being pitched insurance investment or mutual fund investment. 

What will be the source of new bank deposits? Can government/RBI become proactive and make investing in bank deposits more lucrative? Can they waive interest earned upto one lacs tax exempt?

Let's wait and watch how situation unfolds. RBI has to act and act fast- something out of the box solution is needed to solve this puzzle.

- SACHIN GOSWAMI