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Bank Deposits to Swell in the Short Term
Nov 9, 2016

Past few years saw the banks struggling to increase their public deposits. The declining trend of aggregate bank deposits over the past few years was seen as a major concern by all the banks.

Higher interest rate provided by small savings schemes were said to be the major contributor for the deposits to decline. Moreover, banks also had to keep its deposit rates high to fend off competition. Thus in-turn the lending rates remained high for the banks.

However, the governments initiative to curb the menace of black money through demonetization of high value currency notes has meant some good news for the banks. Money which was out of the banking system i.e. excess cash will now enter the banking system in the form of deposits. Thus, in the short term, banks will be awash with liquidity. Aggregate bank deposits growth rate will rise.

In addition, current and savings account, a source of lucrative low cost deposits will also help the banks in reducing their cost of borrowing. This could drive the interest rates lower and provide a fillip to bank credit growth as well.

However, not all will be a positive for the banks. Those banks having a large exposure to real estate developers might see their loan book quality deteriorate. Thus rise in provisioning and loss in interest income due to a spike in bad loans can also result in banks being unable to pass the benefits of cheap deposits to its customers.

Data Source: RBI

This Chart Of The Day was published in The 5 Minute WrapUp - ATM Closed! Relax the Indian Economy Just Got a Booster Shot

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