Banks should worry about CD ratio

The Sensex crossed the 40,000 mark recently on the back of the NDA’s remarkable victory in the Lok Sabha elections. Mutual funds, too, have been gaining traction in recent years. With a total AUM (assets under management) of Rs 24 lakh crore, they constitute 20% of bank deposits, reflecting a change in the savings pattern of Indians.

As on March 31, total deposits of all scheduled commercial banks stood at Rs 125.72 lakh crore, as compared to Rs 114.75 lakh crore on March 31, 2018, a growth of 9%. Total advances, on the other hand, grew from Rs 86.50 lakh crore to Rs 97.62 lakh crore in the same period, a healthy 13% growth. The Credit-Deposit (CD) ratio, which is the ratio of how much a bank lends out of the deposits that it mobilises, went up from 75% to 78% during the same period.

Encouragingly, industry-wise deployment of credit showed a growth of 6.9%, with the highest increase being recorded by infrastructure lending at 18% year-on-year. Lending to the services sector increased by a whopping 17.8%. This increase in credit offtake was a big relief as it leads to increase in investments and creation of jobs in the economy.

So, what do we read into these developments? Has there been a slow and paradigm shift in the preference of households from deposits to other avenues? Haven’t the efforts made by the government on financial inclusion, like the Jan Dhan accounts, helped in raking in deposits from the hitherto unbanked segment of the population? Has there been a revival in credit offtake in recent months after being sluggish for more than six years?

Whatever the reasons, this has raised concerns of a structural liquidity gap in the system — credit growth outstripping deposit growth.

Decline in interest rates and a secular bull run in the stock markets in the last couple of years have led to sluggish deposit growth in banks. Whether this is a one-off event is debatable, but banks cannot kick the can down the road on deposit mobilisation efforts. Some experts are of the opinion that this is a short-term phenomenon and when the stock markets turn bearish and interest rates rise, depositors will come back to the banks.

However, empirical studies reveal that only a sustained increase in disposable incomes and measures taken towards financial inclusion will go a long way in increasing bank deposits. Bank deposits remain the preferred financial asset of households in India because of factors like safety, liquidity and guaranteed returns.

The easiest way to increase bank deposits is to open more branches in the unbanked areas. This is easier said than done as banks find it unprofitable to serve a low-income segment population in remote villages. Without potential customers comprising both borrowers and depositors, setting up a fully staffed branch with fixed costs may not be a sound proposition.

Increased income

The second measure is for the governments to increase the income of the people. Banks will be the direct beneficiaries of increase in disposable incomes of people. This is where job creation in rural areas assumes importance.

Rural development schemes like Pradhan Mantri Awas Yojana, MGNREGA and newly introduced schemes like Pradhan Mantri Gram Sadak Yojana, to which the government has allocated Rs 19,000 crore for development of all-weather roads, should be catalysts in creation of jobs and putting money in the pockets of the rural folk.

The third measure is on financial inclusion, where the government and the RBI can support and promote financial inclusion. The government, having realised the benefits of financial inclusion, has already taken concrete measures in the last few years, which has ensured steady inflow of deposits by bringing more and more households into the formal financial system.

As per data available, there were 35.65 crore beneficiaries of Jan Dhan accounts and the total deposits in these accounts was Rs 98,414 crore as on May 15. Though this is a proverbial drop in the ocean vis-à-vis the total deposits of scheduled commercial banks, it has shown the potential that the unbanked segment holds. A lot still needs to be done in this regard.

With a broader base of depositors and borrowers across India, banks can diversify their sources of funding and lending opportunities. By opening accounts through the Jan Dhan Yojana, the government has ensured that subsidies and other benefits under the direct cash transfer scheme go directly into the bank accounts of the beneficiaries. While this is laudable, accounts of those families left out so far need to be opened.

While this could have been due to lack of documentation, with more Aadhaar cards being issued, it is only a matter of time before bank accounts are opened for those currently left behind. This is only the first step.

The next big step will be to educate and encourage the rural folk to inculcate the banking habit and do more transactions through bank accounts and rely less on cash.

(The writer is with Manipal Academy of Banking, Bengaluru)