Finance Minister Nirmala Sitharaman urged state-run banks to intensify their efforts in deposit mobilisation and initiate special drives to align with the rapid growth in loans. This push comes amid concerns highlighted by SBI Research, which shows that traditional bank deposits are becoming less attractive to younger investors, who are increasingly turning to riskier assets like mutual funds and equities for better post-tax returns.
During a meeting with public sector bank chiefs, Sitharaman emphasised the importance of reviewing the tax structure on bank deposits. SBI economists noted that nearly 47% of term deposits are now held by senior citizens, indicating a shift away from conventional banking by the younger population. In contrast, the median age of capital market investors has dropped to 32 years, with around 40% of these investors under 30.
Senior citizens currently benefit from higher returns on deposits, along with tax exemptions on interest earnings. However, with lending growth outpacing deposit growth, both the Reserve Bank of India (RBI) and the Finance Minister have stressed the need to address this imbalance to prevent potential ?systemic risks? in the future.
At the meeting, Sitharaman also urged banks to enhance customer relations by focusing on outreach efforts, particularly in rural and semi-urban areas. She further recommended that banks fortify their technology platforms to safeguard against cyber threats, stressing the importance of a collaborative approach between banks, the government, regulators, and security agencies to mitigate cyber risks. The Finance Minister highlighted the need for periodic and thorough reviews of IT systems from a cybersecurity perspective to prevent breaches or compromises.
Sources indicated that deposit mobilisation was a central theme of the discussion. With the stock market performing well and mutual funds gaining popularity, particularly among younger investors, fixed deposits have become less favorable due to their tax treatment. The SBI report suggested revising the tax treatment of deposits by taxing them at redemption rather than on an accrual basis, and by delinking their tax status from the highest income bracket.
SBI's analysis, covering data from 1970-71 to 2023-24, found that if per capita income increases by Rs 1,000, bank deposits increase by Rs 613, factoring in taxes. Without the tax impact, deposits could have risen by Rs 652, indicating a 7% reduction due to taxation. The report also noted a significant rise in mutual fund investor accounts, which grew nearly fivefold from under 40 million in March 2014 to over 190 million in June 2024. However, the number of unique investors has only increased marginally, suggesting a trend of portfolio diversification across multiple mutual funds. (TOI)
