CHENNAI: Liquidating bank deposits when in need isn't unusual. But if banks do that, one may have to pay attention.
Deposits of financial institutions including banks, mutual funds, provident funds etc, shrunk in FY15 — the first time in three years. As per the latest RBI data on ‘Composition and ownership pattern of deposits with scheduled commercial banks: March 2015,’ banks have eaten into their own deposits worth Rs 35,260 crore in FY15, ie., a de-growth of 9.4 per cent over FY14. More alarming is the case of mutual funds, who pulled out a massive Rs 47,578 crore deposits or 34 per cent down from FY14.
Like households, banks park excess cash in savings, current and term deposits with itself or other banks and earn income. And like individuals, banks too dig into the corpus. This is usually done to reduce market borrowings and meet lending requirements from internal sources. “The fall in deposits for banks was due to a shortage of funds. If there is credit growth, then there would be a tendency for a slowdown in deposits,” Madan Sabnavis, Chief Economist,Care Ratings told Express.
But strangely, this doesn't seem to be the case if you go by FY15 credit growth data. As fewer borrowers sought capital, bank's lending fell to a 20-year low of 8.6 per cent. In contrast, when credit growth was a healthy 14.3 per cent in FY14, deposits by banks and mutual funds grew 27 and 79 per cent respectively!
A plausible explanation for shrinking bank deposits could be rising bad loans. For every loan that turns bad, banks have to set aside money to absorb defaults.
As per Reserve Bank's Financial Stability Review, provisioning by 39 listed banks grew nearly 25 per cent during the July-September quarter of FY16, but supposedly inadequate.
Growth in bad loans has been staggering and in the event of a bank default, it's the humble households that will have to take a hair cut. For, of the country's total deposits stood of Rs 89,72,714 crore, household sector contributes a whopping 60.1 per cent. But analysts say, individual savers need not press the panic button yet.
“Savers need not generally worry about deposits as it has been ensured that banks never fail. Even Global Trust Bank (GTB) was taken over securely and no one lost out.
“There is also deposit insurance to protect up to Rs 1 lakh of deposits. Therefore, while PSBs have high NPAs, they are unlikely to ever fail with government backing. Even those with high NPAs of over 10 per cent never posed risk to the deposit holders,” said Madan.