Banks fail the ‘deposits' test after seven years

For six long years, the Indian banking industry has had no difficulty in collecting a larger sum as fresh deposits than the previous year.

That record had been broken in 2011-12 with the industry failing to match the collections of 2010-11.

For the year ended March 2012, banks added Rs 6.95 lakh crore to their deposit base, a decline from the figure of Rs 7.15 lakh crore garnered in 2010-11.

The shortfall in fresh mobilisation also resulted in the growth rate declining from 16 per cent in 2010-11 to a little over 13 per cent in the fiscal year just gone by. The decline has come about despite a trend of rising interest rate that began in the later part of 2010-11 being sustained through the whole of 2011-12.

For instance, State Bank of India's three-year deposit rate was 6.5 per cent in August 2010. The current deposit rate for a similar term now is 9.25 per cent.

Many alternatives

There is also evidence of investors making use of other options fetching higher rates of returns. The year 2011-12 saw quite a few debt instruments especially from non-banking finance companies hitting the market. Gold inflows have seen an upsurge.

Non-banking finance companies raised nearly Rs 6,400 crore by way of bond issues in 2011-12, offering yields of 10-13 per cent.

Additionally, another Rs 30,000 crore flowed into tax-free bonds issued by entities such as NHAI. Infrastructure bonds which offered tax exemption on the value of investment were also raised during this period. The data on the exact quantum of money raised arenot known as yet.

There is also evidence that investors put more money into physical assets such as gold. Data from the World Gold Council show that Indians poured roughly Rs 1.58 lakh crore into gold in first nine months of 2011-12, a 15 per cent jump over last year. The trend of increasing preference witnessed in 2010-11 (45 per cent) has been sustained in 2011-12.

Investors are continuously chasing avenues to better their returns on savings is clear from two distinct pieces of data.

Small savings schemes suffered an outflow of Rs 7,000 crore. Even within the pool of sums invested in banks investors have shifted more monies from savings bank accounts to term deposits to earn a higher yield. Inflation in the economy, as measured by rise in consumer prices, was close to 8 per cent in 2011-12.

With deposit inflows flagging banks are raising their interest rates once again. About 20 banks have raised their deposit rates in the last two months. The banks' credit:deposit ratio too is at a all-time high of 78 per cent.