Money & Banking

As bank deposit rates fall, savers are diversifying their investments

K Ram Kumar Mumbai | Updated on January 16, 2018 Published on September 23, 2016


Share of bank deposits in household sector’s investment in financial assets has declined to 41% in FY16 from 54% in FY14, show RBI data

Lower returns on bank deposits in the last two-three years has nudged yield-hungry savers to diversify into other financial assets, including shares, debentures and deposits with non-banking companies.

According to RBI data, the percentage of bank deposits in overall savings/investments made by the household sector in financial assets declined from 54 per cent to 41 per cent between financial years 2013-14 and 2015-16.

While median deposit rates inched up from 7.42 per cent in March 2013 to 7.78 per cent in September 2013, they started trending lower gradually thereafter.

Deposit rate cuts gathered momentum from June 2014 onwards, declining 1.11 percentage points from 7.74 per cent to 6.63 per cent in June 2016.

In FY2015-16, investments in financial assets — including bank deposits, non-banking deposits, life insurance funds, provident and pension funds, currency, shares and debentures — in the economy grew by ₹14,89,853 crore.

Financial assets in FY15 and FY14 were up by ₹12,72,240 crore and ₹11,99,278 crore, respectively.

In its annual report for 2015-16, the RBI said the increase in gross financial assets was driven primarily by a turnaround in small savings and increases in investment in equities and mutual funds, tax-free bonds by public sector units and currency holdings even as the growth in bank deposits held by households moderated.

“Time deposits were muted by the moderation in deposit rates…Large issuances of long-term tax-free bonds by various public sector units contributed to the deceleration in deposits, besides the higher returns on small savings which are not subject to tax deduction at source,” the RBI said.

For example, in December 2013, NTPC had issued 10-year tax-free bonds at a coupon rate of 8.66 per cent when the median term deposit rate was 7.75 per cent.

Not too worried

However, bankers are not unduly worried by the slack deposit growth due to savers’ preference for high-yielding investments.

“If the credit appetite in the economy is muted, we are better off modulating the deposit growth through deposit rate cuts. If credit growth picks up, we have the flexibility to up the deposit rates to attract resources,” said a senior official at a public sector bank.

The household sector’s investment in shares and debentures was up from 3.54 per cent of overall financial assets in FY14 to 6.15 per cent in FY16. During the reporting period, the equity benchmark BSE Sensex rose from 18,865 points to 25,342 points.

With non-banking company deposits fetching almost 0.75 to one percentage point more interest, savers, faced with bank deposit rate cuts, were attracted to these deposits.

Currency holdings

On currency with the household sector increasing from 8 per cent of overall financial assets in FY14 to 13 per cent in FY16, the RBI observed that anecdotal evidence suggests several forces at work.

According to the central bank, the increase in currency is due to simultaneous conduct of elections in various States; a possible response to increases in the rate of service tax; and the jewellers’ strike protesting excise duty increases in the Union Budget, which effectively impeded the return flow of currency.

Rising disposable income coupled with increased risk-taking ability in order to earn higher returns is probably prompting investors to diversify their investments, summed up a banker.

Published on September 23, 2016

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