High spending, outward flows slowing deposit growth: SBI report

Deposit mobilisation by scheduled commercial banks in the country remained sluggish with a growth of 9.9 per cent in FY16 (till 18 March 2016), a 53-year low, on the back of increased consumer spending and outward remittances, says a study by the Economic Research Division of State Bank of India.

The sluggishness in deposit growth, in turn, has resulted in an ''acute shortage of funds'' with banks for onward lending purposes, says the 'Ecowrap' report.

According to the 'Ecowrap' report tries to disprove the popular perception that high real interest rate will lead to lower deposit growth rate. Instead, it says, it is increased spending and outward remittances that cause a slowdown in deposit growth.

At the same time, the report points out that a lower rate of inflation should lead to lower spending.

It is quite paradoxical that people spending more and increasing outward remittances could be two reasons for the sluggish growth in deposits of banks, at a time when lower inflation tends to slow spending.

''This is paradoxical, but the divergence between the two has been widespread and in opposite directions since September 2014. Despite a relatively high real interest rate, deposit growth of banks have not picked up,'' says the report.

RBI data show that scheduled commercial banks in India had deposits aggregating Rs93,78,650 crore as of 18 March 2016, against Rs85,33,285 crore as of 20 March.

The bank's economic research team believes that real deposit rates are more the by-product of lower inflation, which could also result in increased spending and currency leakages.

Also, according to the SBI study, RBI's hike in outward remittances limit under the Liberalised Remittance Scheme (LRS) could be pushing up outward remittances, data showed.

Outward remittance under LRS has seen a huge jump as soon as the limits were revised. From $106 million in May 2015, the remittances reached $449 million in February 2016, a jump of 324 per cent.

Since the LRS was introduced in 2004, the ceiling has been revised according to the prevailing economic scenario. At present, the limit stands at $250,000 per financial year. This limit was doubled in May 2015.

Meanwhile, RBI governor Raghuram Rajan had recently said thre increased cash flows could be due to impending elections.

''Around election time, cash with the public does increase; you can guess why. ''And you see that not just in the States going to polls but also the neighbouring States. So there is something there, we need to understand it better, but it is about Rs50,000-60,000 crore more than we anticipated at this time of year.''