Global brokerage firm Goldman Sachs has highlighted several challenges to deposit growth in Indian banks, signaling a decline in their attractiveness as investment options. These challenges are attributed to various factors reshaping the financial landscape in the country.
Shift in Financial Savings
Goldman Sachs identifies strained financial savings as a significant headwind impacting deposit growth. The emergence of alternative investment avenues, such as stock market investments, has diverted funds away from traditional bank deposits. Moreover, the substantial growth observed in government savings schemes, including Public Provident Fund (PPF) and Small Savings, has further diminished the allure of bank deposits. These schemes now constitute a substantial portion, accounting for 21% of total deposits.
Impact of Government Savings Schemes
The rise in alternative government savings schemes has had a considerable impact on deposit mobilization. Goldman Sachs notes that the increase in these schemes alone contributed to 34% of the overall deposit growth between FY21 and FY23. This trend underscores the growing preference among investors for government-backed saving instruments over traditional bank deposits.
Need for Attractive Rates
To counter the declining attractiveness of bank deposits, Goldman Sachs suggests that the banking system must offer competitive interest rates. With consumers increasingly turning to alternative investment options, banks need to provide compelling incentives to retain depositors and attract new funds.
Competition from Government Small Savings
Government small savings investments pose significant competition to bank deposits, offering higher interest rates and attracting a substantial portion of the deposit pool. This competition further erodes the share of deposits in the household financial asset mix, which declined to 45% in FY23, down from 48% in FY21.
Implications for Household Financial Assets
The declining share of deposits in the household financial asset mix has broader implications for household financial well-being. With only 35% of incremental flows directed towards deposits, the overall contribution of net financial assets to GDP has significantly decreased, reflecting a shift in investment preferences among households.
Goldman Sachs’ analysis sheds light on the evolving dynamics of the Indian financial sector, emphasizing the need for banks to adapt their strategies to remain competitive in a changing landscape characterized by increasing diversification of investment options and evolving consumer preferences.
