Covid-19 Impact: Bank Deposits Reflect The Pandemic’s K-Shaped Impact

This impact is clearly visible in the disaggregated data for bank deposits, now available for the full financial year of 2020-21.

Bank deposit growth had remained strong through much of the pandemic year because of precautionary savings, limited avenues to spend and government relief measures. Break-up of the deposit data, released by the Reserve Bank of India last week, however, show that metro cities led the growth, while deposit accretion in rural areas suffered.

• Deposits in metropolitan areas rose 14.9% to Rs 79.13 lakh crore.

• Semi-urban areas saw deposits rise by 9.7% to Rs 23.23 lakh crore.

• In rural areas, deposits rose 10.6% to Rs 4.5 lakh crore.

This was in sharp contrast to higher growth in rural and semi-urban areas in the past three preceding years. For instance, in FY20, while aggregate deposits grew by 18.1% in rural areas and by 13.2% in semi-urban areas, metropolitan areas recorded the slowest pace of growth at 6.9%.

Incrementally, too, the share of deposits from metros rose sharply.

• Metropolitan areas contributed 60.7% of all deposits compared to 37.2% in FY20.

• Semi-urban areas contributed to 12.2% of all incremental deposits in FY21 compared to 20.7% the previous year.

• Rural areas contributed just 2.6% to all incremental deposits from 5.2% in the same duration.

Deposit growth is healthy across markets with urban savings more than rural, top districts saving more than the mid and lower districts and districts with predominance of IT-related labour force showed better traction than other places, according to a research note by Kotak Institutional Equities dated June 7.

However, the longer-term behaviour of depositors remains difficult to gauge, the research house said. Consumers could use accumulated deposits to pay down debt, invest in physical or financial assets or spend. At this point, it appears depositors are conserving money primarily in savings accounts rather than term deposits, indicating it’s unlikely to be a long-term decision to hold more precautionary savings, the report said.

In metropolitan areas, people have been able to stay at home and save more, especially in IT hubs such as in Pune and Bengaluru, said Sanjay Agarwal, senior director at Care Ratings. In addition, companies are saving cash and sitting on more liquidity, causing sharp deposit growth.

Overall, current account and savings account deposits rose 17.6% year-on-year. Current account deposits rose 21%, while savings account deposits rose 16.7%. In both categories, metros led the growth.

Rural Deposits Slowing: What It Could Mean?

In rural areas, higher growth in previous years has given way to lower growth, possibly as some rural households have had to dip into their deposits to sustain, said Agarwal.

DK Joshi, the chief economist at Crisil, said the data could indicate rural households are holding onto more cash or don’t have enough to deposit. This trend is likely to have worsened after the onslaught of the second wave.

Households dipped into their savings for sustenance previously, but this phenomenon may not have played out in the second wave with depletion of savings, said Joshi.

Growth in deposits with scheduled commercial banks, has declined starting April 2021, compared to last year, when deposit growth had moved up, Joshi said in a note dated June 7, 2021.

Between April and May 21, 2021, deposits grew by 0.35%, according to weekly data by the RBI, compared to 2% in the same period last year. Time deposits, such as fixed deposits, rose 1.66% since the start of the current financial year, compared to a rise of 3.6% last year. Demand deposits, which include current account and savings accounts, contracted by 9.4% over April-May, lower than a contraction of 10.5% in the same time last year.

This could be indicative of pressure on incomes and a simultaneous rise in medical expenditure given the heightened ferocity of the second wave. This, in turn, implies that that the prospects of a pent-up demand could be bleaker this time, Joshi said.