Demonetisation aftershocks: bank deposit growth lowest since 1963

The rate of growth of bank deposits fell to 6.7 per cent in 2017-18, hitting the lowest since 1963, according to data available on the Reserve Bank of India (RBI) website. This could be other savings instruments like mutual funds and insurance becoming more attractive to investors, says a research report in The Economic Times.

Also, banks are yet to recover from the after-effects of the November 2016 demonetisation of high value currency notes, the report says. 
Instead of gaining from the weeding away of illicit cash from the system, the demonetisation process seems to have adversely affected banks’ competitive edge vis-à-vis other channels of financial investment, says the report. 
In fact, with demonetisation, there was a steady fall in bank deposits as the weeding out exercise slowed money flows into the banking system. Also, bankers say with the high-value Rs2,000 notes opening fresh scope for money hoarders, banks are now seeing a reversal of the huge deposits collection in the aftermath of the November 2016 demonetisation. 
Between November and December 2016 banks received Rs15,28, 000 crore in deposits as people returned high-value notes in exchange for the newly printed notes. Aggregate deposits with banks during the fiscal ended 2017 grew 15.8 per cent to Rs10,800,000 crore. 
While the pace of deposit growth has now come down to 6.7 per cent, aggregate deposits with banks stood at Rs11,40,000 crore - up R60,000 crore from the post-demonetisation figure. 
On the other hand, the report says, mutual fund assets under management increased 22 per cent to Rs21,36,000 crore in March 2018 from Rs17,55,000 crore in March 2017. Mutual fund assets had grown 42 per cent from Rs12,33,000 crore in March 2016 to Rs 17.55 lakh crore in March 2017. 
Also, insurance premiums have increased to Rs1,93,000 crore in March 2018 from Rs1,75,000 crore in March 2017 and Rs1,38,000 crore in March 2016. 
Bank are now forced to raise interest rates to attract deposits. Last week, HDFC Bank hiked fixed deposit rates in select tenures for deposits under Rs1 crore by up to 100 basis points. 
Bankers say bank deposits are still seen as a liquid investment option which mutual funds and insurance schemes cannot compare with. Also, mutual fund investments ultimately make it to bank deposits.