With only a few days left before the deadline ends to deposit the scrapped notes in banks, everybody is anticipating that the curbed limit on cash withdrawals will also be lifted soon. However, going by what the State Bank of India's (SBI's) Chairwoman, Ms Arundhati Bhattacharya, shared with the media recently, it seems neither will the restrictions on cash withdrawals go in a hurry, nor the interest rates on deposits be restored to pre-demonetisation levels.

According to the top banker of India, there is a keen interest among people in going digital; which is why there is a possibility that more than 15% deposits that have flown into banks post demonetisation, may stay back. Some bankers expect the retention rate to be as high as 40%. So, let’s assess how it would impact banks…

Banking problem: Higher deposits and lower credit growth

As per the Reserve Bank of India (RBI), banks had received Rs 12.4 lakh crore worth scrapped notes until December 10, 2016. It’s needless to say that, this figure would climb up by December 30, 2016. Besides, the RBI data for the Q2FY17 reveals that all scheduled commercial banks in India had Rs 28.35 lakh crore in savings bank accounts.

Thus, a conservative estimate suggests that the banks may witness a retention of anywhere between Rs 1.87 lakh crore or 2.49 lakh crore in savings bank accounts post demonetisation (assuming a retention of 15%-20%). In other words, as compared to the level of deposits in savings bank account at the end of Q2 FY17, the bank deposits in savings accounts may grow at 7%-9% - everything else would remains the same.

From 10.38% in April 2016, the credit growth of banks has shrunk to 5.76% as on December 9, 2016.  The average loan growth for the last 3 months has been 8.7%. It is also expected that unless the cash crunch in the economy ends, credit growth won't witness any revival. On the contrary, banks expect the bad loans to escalate in the aftermath of demonetisation. 

In this regard, what the Chairperson of SBI said holds significance.  “I am still being optimistic and saying that if we can get back into normal mode within the next one month or so, the impact will be temporary. But, having said that, I think that the SME sector will need some hand holding because they don’t really have any staying power, they don’t have deep pockets. They make a day-to-day living and their margins are compressed in any case.”

To sum this up, it means, while banks may witness improved liquidity in months to come, they would continue to grapple with a problem of high Non-Performing Assets (NPAs). The combination of lower credit growth and rising NPAs would put a lot of pressure on banks to manage costs. Many banks have already slashed interest rates on term deposits. Maybe, it’s time for them to reduce interest rates on even savings bank accounts.

PersonalFN is of the view that amid such times where interest rates are likely to go down, it’s important for you investors to deploy your funds wisely. There’s no point holding too much money in your savings bank account, and if you do so, the interest earned beyond a sum of Rs 10,000 would be taxable (as per provisions of Section 80TTA of the Income-tax Act, 1961).

Instead, put your money to productive use, in asset classes and investment avenues that can generate tax efficient returns and even beat inflation (as it erodes the purchasing power of your hard-earned money). While you do so, recognize your financial goals, give importance to your risk profile, and diversify your investment portfolio. Don’t take risks; it can be hazardous to wealth and health

You may park only 6 to 24 months of your regular expenses, in savings bank account to handle contingencies that loom around: medical emergencies, loss of job and so on. Alternatively, you could even consider investing in liquid funds, which may provide you a notch better returns than what a savings bank account may fetch you.

If you are unsure as to which liquid funds are good to invest (to park in money for the short-term or handle contingencies), and want to invest in promising equity mutual fund schemes, you may subscribe to PersonalFN’s unbiased mutual fund research services.

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