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The banking system could face ‘deposit leakage’ due to State elections scheduled for this year and recapitalisation bonds that the government will issue to public sector banks, according to a State Bank of India research report.
Given that many State elections are scheduled for 2018, SBI’s ‘Ecowrap’ report said the growth in currency in circulation is likely to remain robust. This, in turn, would put pressure on bank deposits to expand as it represents a leakage from the banking system.
Furthermore, the public sector bank (PSB) recapitalisation plan through recap bonds will also lead to leakage of deposits from banks.
In order to plug this leakage, the report underscored that banks may have no other option but to increase the deposit rates, which in turn may put pressure on lending rates. This trend may pick up pace with more banks joining the bandwagon.
As part of its overall plan to recapitalise PSBs to the tune of ₹2.11-lakh crore, the government will be issuing recapitalisation bonds of ₹1.35-lakh crore to PSBs and the funds so raised will be utilised to infuse equity capital in banks.
After the initial spike in deposits due to demonetisation, deposits growth started moderating from April 2017. From a peak of 15.6 per cent year-on-year growth in the fortnight ending November 25, 2016, the growth came down to 10.9 per cent in April 2017. This has further reduced to 5.9 per cent for the fortnight ended February 16, 2018.
Meanwhile, as per Ecowrap, the currency in circulation has increased rapidly in the past two months. On a monthly basis, growth has been ₹0.45 lakh crore and ₹0.51 lakh crore in January 2018 and February 2018, respectively, compared to an average of ₹0.1 lakh crore and ₹0.2 lakh crore, respectively, in these two months in previous years (except 2017).
Incidentally, the report said, income velocity (based on GDP estimates for the October-March FY18 period) for January 2018 and February 2018 is also showing an uptick, despite the increase in currency with public. This indicates better growth prospects for the economy.
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