India Inc's bank deposits zoom

Individuals are now borrowing money instead of saving it.

Bank deposits are no more a preferred savings instrument for retail investors. In a reversal of trend, individuals are now borrowing instead of saving. In another role reversal, more and more companies are parking funds with commercial banks instead of borrowing from banks.

Till about three years back, retail customers (read the household sector) accounted for the largest chunk of fresh bank deposits every year. This is not the case any more. In financial year 2003-04, the household sector's contribution to the banking sector's deposit growth was 22.3 per cent, sharply down from 57.8 per cent recorded in the previous year.

Similarly, the private sector's contribution to the deposit kitty was 21.7 per cent, sharply up from 2 per cent. "Even though the latest data are not available, this trend has been continuing," said the CEO of a private sector bank.

When it comes to advances, retail loans account for 80 per cent of ICICI Bank's incremental credit growth in the first half of this year. The comparable figure for the public sector Union Bank is about 28 per cent.

There are quite a few reasons for the slowdown in retail participation in bank deposits. First, the impact of the low-interest regime was felt more by depositors, who looked for alternatives. At the same time, the lower interest rates made borrowings from banks more attractive.

In other words, banks cut their deposit rates more sharply than their lending rates. Even now, after interest rates have started to go up, the average yield on deposits for more than one year is about 5.25-6.25 per cent, lower than the yield on small savings instruments.

Secondly, there is no tax incentive for depositors to park money with banks, whereas mutual funds offer a tax shelter through dividend payments, and the capital gains tax on stocks held for more than a year has been abolished.

Naturally, many depositors have shifted focus to the stock market. The yield on investments in Sensex stocks was 83 per cent in 2003-04 and 16 per cent in 2004-05. This year, it has been about 31 per cent, five times the yield on bank deposits.

"We have seen individuals liquidating their term deposits and putting money in the stock market, either directly or through mutual funds," said another banker.

At the same time, private firms and public sector undertakings have started parking the bulk of their funds with the banking system, as they can extract slightly higher interest rates from banks.

Apart from a few treasury-savvy companies like Reliance Industries, Mahindra & Mahindra, Bajaj Auto and Maruti Udyog, most of the fund-flush companies prefer to keep funds with banks till they can take firm decisions on fresh investments.

"In 2004, we saw a lot of corporate funds in the banking system as. At that time, most companies were chalking out their investment plans. Subsequently, the flow has slowed down as they have started making investments," pointed out a general manager in charge of credit with one of the public sector banks.

The Reserve Bank of India's data on the ownership of bank deposits in March 2004 (the latest available data) show a sharp decline in the household sector's contribution to bank deposits during the year, to 22.3 per cent.

However, on all outstanding deposits (not just fresh ones in one year), the decline in the household sector's share in bank deposits has not been as sharp. It came down from 64 per cent in 2003 to 60 per cent in 2004. Analysts say this figure could have come down to around 57 per cent by now.

"With the stock market doing well, more and more individuals will start taking the risk of putting money in the market. The absence of any tax break is also a disincentive for retail depositors," said a Mumbai based public sector bank chairman.

The RBI data on the ownership of deposits are based on a sample of 9,933 out of 66,070 branches of scheduled commercial banks. The household's sector share was 85.3 per cent of the deposits in rural India and 45 per cent in metros.