As investment avenues shrink during COVID-19, bank deposits shine

According to a Care Ratings note dated 25 April, following the COVID-19 pandemic and the subsequent extended shutdown, many investors have shifted to bank deposits instead of investing in debt mutual funds (MFs) as this market is currently quite volatile. The rating agency said assets in debt MFs declined to ₹11.8 trillion as of March from ₹12.8 trillion at the end of December. However, bank deposit growth moderated to sub-10% levels now from 10% as on 29 March 2019 and 10.6% as on 12 April 2019.

Suresh Khatanhar, deputy managing director, IDBI Bank, said given the uncertainty, people want their investments to remain liquid and safe and therefore bank deposits are back in favour.

“There are no safety nets available, even gold prices are so volatile and people are putting money in bank deposits despite falling rates because customers are prioritising liquidity and safety of their investments. They are not so concerned about a few basis points change in interest rates,” said Khatanhar, adding that deposit rates are not expected to move further south for the next couple of months.

Deposit rates have been declining for the past few months as banks have abundant liquidity amid falling credit demand and reluctance to lend fearing another round of bad loans. According to data from the Reserve Bank of India, available up to February 2020, the weighted average deposit rate of commercial banks has declined by 45 basis points (bps) since February 2019. The steepest fall has been in foreign bank deposit rates, by 130 bps, followed by private banks at 55 bps and public sector banks at 36 bps during the period.

For instance, State Bank of India (SBI) deposit rates, used as a benchmark by the industry, is now in the range of 3.5-5.7%. Deposits between one and two years, the most popular category, now earn an interest of 5.7% at SBI. That apart, the government securities (G-sec) are the safest investment option as they carry a sovereign guarantee. The yield on the two-year G-sec was at 4.54% on Monday and the 10-year benchmark bond yield was at 6.15%.

An expert tracking the banking sector, on the condition of anonymity, said despite the problems in the banking sector, customers rely on fixed deposits for fixed returns. Citing the recent crisis at six Franklin Templeton debt funds, the expert said such episodes lead to customers seeking safer avenues of investing.

Meanwhile, as the central bank lowered the repo rate by 75 basis points last month, non-food credit growth of commercial banks picked up and grew 7% in the fortnight ended 10 April to ₹102.85 trillion, showed RBI data.

This is an improvement from the 6% credit growth seen in the previous fortnight or the fortnight ended 27 March. Credit growth has been slowing for the last several quarters and is expected to go further south as the COVID-19 pandemic disrupts credit disbursals. However, lenders, mostly from the public sector, are trying to push their COVID-19 emergency credit lines to borrowers.