BANK DEPOSITS IN FAVOUR

Indian households slowed their saving spree in 2008-09, though they continued to put their money in safe investment avenues such as bank deposits. That is the key takeaway from the RBI’s latest Annual Report released this week. Savings increased marginally by 4.3 per cent for the year, according to the Annual Report. Apart from lower consumption, the Sixth Pay Commission arrears and increased income levels of the public sector employees probably flowed into savings. Provisional data show that net household financial savings now constitute 10.9 per cent of GDP, down from 11.5 per cent in 2007-08. The ratio fell because savings increased at a lower rate than the country’s GDP (which grew 6.7 per cent for the year).

One highlight of the household savings patterns is the massive Rs 4,09,678-crore accretion to bank deposits in 2008-09. In the first four months of 2009-10, more than Rs 2,30,000 crore deposits were collected, which forms 35 per cent of the deposits collected in 2008-09. From the provisional data, it is clear that banks continue to form the single largest vehicle for household financial savings, absorbing 55 per cent of the money put away this year.

More attractive rates


In recent years, banks seem to have even attracted funds that were earlier earmarked for small savings schemes. The stagnant interest rates on small savings even as bank deposit rates climbed in 2008, tax exemptions to five-year bank deposits and the taxing of interest from small savings schemes made bank deposits a more attractive option. The flight to safety triggered by the equity market meltdown and worries about rising credit risk also channelled a flood of money into safer avenues. Apart from banks, NBFCs too witnessed a surge in deposits, with an inflow of almost Rs 13,400 crore in 2008-09, compared to Rs 3,700 crore in 2007-08. The fact that NBFCs offered rates that were almost 2 percentage points higher than bank deposits, helped them attract a share of deposits too. Small savings schemes lost share of incremental household savings, falling from a one-fifth share in 2004-05 to a meagre 1.4 per cent for 2008-09. The eroding share of small savings can be traced to interest rate swings.

Small savings schemes witnessed net outflows since December 2007, when bank term-deposit rates actually crossed the small savings interest rates. However, there was a greater preference for small savings in 2008-09 with marginal net inflows (Rs 10,400 crore) compared to net outflows the preceding year. Bank deposit rates began their descent in the latter half of 2008-09 and if they continue to fall, small savings schemes may see a revival in inflows.

Other avenues


Insurance companies did improve their share in incremental household savings to 20 per cent in 2008-09 from 18 per cent the previous year, helped by tax benefits and the added life cover. Mutual funds (debt and equity) which contributed, on an average, Rs 39,000 crore per year to gross household savings during 2005-08, witnessed an outflow of Rs 10,478 crore in 2008-09. This was partly due to the risk aversion of investors and underperformance of these funds because of the equity market meltdown as well the problems faced by debt schemes mid-year.

The ratio of mutual funds to total gross household savings increased from 0.4 per cent in 2004-05 to 7.9 per cent in 2007-08, indicating a manifold increase in new inflows to these schemes.

Investments in India Inc, by way of equity and debentures in the primary market, saw their proportion falling slightly to 4.2 per cent from 4.4 per cent the preceding year.