In the last few years, more and more Indians have begun investing in equity markets, either directly buying stocks or through mutual funds. The rally in stocks in the last two years has only attracted more people and more money. Now, over Rs 20,000 crore is coming into mutual funds through systematic investment plans (SIPs) per month. But, as capital markets have gained traction, bank deposit growth has lagged. State Bank of India, the country’s largest lender, feels a parity on the taxation front for bank deposits with other asset classes may be the need of the hour.
Over the last one year, the benchmark BSE Sensex has surged 21 per cent. The smallcap index has jumped close to 64 per cent in the same period. In comparison, fixed deposits in banks offer around 7 per cent interest rate annually. That is perhaps why there are few takers for bank deposits right now and that is not good for banks at a time when credit growth has been strong.
It is not that deposits aren’t growing. In the last financial year (2023-24) bank deposits grew around 14 per cent. But, they significantly lagged behind credit growth of around 20 per cent. Bank deposits are a great low-cost avenue of funds for banks. So, how do you make them attractive again?
“In line with mutual funds/ equity markets, we propose that the government should tweak the tax on deposit interest and make flat tax treatment across maturity ladder,” Soumya Kanti Ghosh, group chief economic adviser at SBI said in his report ‘Prelude to Union Budget 2024-25.’
He said that the present dispensation for equity and mutual fund holdings stipulates short-term capital gains tax at a flat rate of 15 per cent, while the long-term capital gains are taxed at a moderate 10 per cent, with exemption allowed till income of LTCG up to Rs 1 lakh during a given financial year. He further noted that the setting-off of loss against profits and carrying over the loss up to the next eight years make the opportunity cost of such alternate investments quite lucrative.
Ghosh pointed out that household net financial savings had declined to 5.3 per cent of GDP in 2022-23 and expected to be 5.4 per cent in 2023-24. If the deposit rate was made attractive in line with mutual funds, it could push up household financial savings and CASA (current account, savings account deposits of banks), he said.
“Increase in bank deposits will bring not only stability in core deposit base and financial system but also financial stability in household savings as the banking system is better regulated and having a superior trust as compared to other alternatives with high volatility/risk,” he opined.
He also said that deposits were taxed on an accrual basis and other asset classes only on redemption and there was also a need to remove this treatment.
The SBI research report also called upon the government to step up the disinvestment of public sector lenders.
“As banks are in good condition, the government should take a stance on disinvestment of PSBs,” said Ghosh.
Over the last one year, shares of state-owned banks have rallied sharply in line with a rally across the listed PSU space.
The Government and Life Insurance Corporation of India are selling an almost 61 per cent stake in IDBI Bank, they invited bids from buyers in October 2022 and in January 2023, DIPAM (Department of Investment and Public Asset Management) received several expressions of interest for the IDBI Bank stake on offer, pointed Ghosh, adding the expectation is that the government would clarify this in the Budget.
“Also, the divestment targets need to be more realistic and start now sans hesitations/deliberations given the maturity of the Indian banking system and need to scale up in collaboration with global peers, reducing the stake in IDBI Bank a good fit case for such reality check,” he said.