Improve bank deposits by lowering tax on FDs

This has been spurred by a steady rise in FD interest rates that are now touching 9.5 per cent.

Image used for representative purposes only.

The debate about whether bank deposits are growing at a robust pace or not needs to be resolved. At a meeting of state-owned banks on Monday, the finance minister once again emphasised the need to mobilise deposits through special drives and better outreach because there is a concern that deposits are growing slower than credit.

A mid-year Reserve Bank report said that while bank credit had grown 13.7 per cent, deposit growth was struggling at 10.6 per cent. On the other hand, an SBI research study claimed that flagging deposit growth was a ‘statistical myth’ as it has grown to a robust Rs 61 lakh crore since 2021-22, ahead of credit growth of Rs 59 lakh crore.

In 2022-23, the banking sector registered the highest absolute growth in both deposits and credit since 1951-52, the SBI report said.

Where the rub is - and where the RBI and SBI studies seem to converge - is that there has been a decline in current and savings account (CASA) deposits in the total portfolio of deposits, down to 41 per cent in 2023-24 compared to 43.5 per cent the year before. This threatens the stability of the banking system as these CASA deposits are mainly being used for transactions like UPI payments.

However, the CASA deposit decline has been more than made up by a rapid rise in term savings like fixed deposits, which have risen to 59 per cent in 2023-24 from 56.5 per cent the year before. This has been spurred by a steady rise in FD interest rates that are now touching 9.5 per cent.

Significantly, 47 per cent of the FD portfolio is from investments by senior citizens, while younger earners prefer the risky but better returns of the stock market or mutual funds. Senior citizens have traditionally preferred the higher safety and steady returns of bank term deposits, and that story has not changed.

It is therefore ironic that the finance minister chose to reduce long-term capital gains tax on a slew of instruments including shares and mutual funds to 12.5 per cent while continuing to tax those who prefer the safer FDs at as much as 30 per cent. This is just one instance on how the government is driving money to more risky instruments rather than into the banking system. The anomaly must be corrected by making bank deposits more attractive.