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Banks lose out on deposits, savings instruments gain

This may appear contrary to popular belief, but it’s true. Bank deposits, despite their safety and ease of operations, seem to be fast losing their charm among Indian households as the best place to park money in. Gaurav Choudhury reports. Safety is the key

india Updated: Aug 29, 2011 01:32 IST
Gaurav Choudhury

This may appear contrary to popular belief, but it’s true. Bank deposits, despite their safety and ease of operations, seem to be fast losing their charm among Indian households as the best place to park money in.

Over the past three years, households have increasingly preferred to save their growing disposable incomes in government-backed savings instruments and long-term insurance products, rather than in bank deposits.

In 2010-11, bank deposits accounted for 42% of all household savings, a sharp drop from 53% in 2008-09, data released by the Reserve Bank of India (RBI) last week in its latest annual report showed.

Effectively, on an average, of every Rs100 as household saved, it set aside Rs42 in bank deposits (fixed and savings) compared to Rs53 three years ago.

Investment in life insurance products and government-backed savings instruments such as national savings certificates (NSCs) and post-office savings, appear to have caught the fancy of households.

The share of government-backed savings instruments in household savings saw a major spike to 6.5% in 2010-11 from 1.4% three years ago.

Such instruments offer 8% annualised return compared to 4% in savings bank accounts.

Likewise, investment in life insurance products have grown sharply during the period, with its share in savings growing to 24.2% from 21.0% three years ago, implying nearly a quarter of an average household's savings are now moving here.

Experts attributed the changing savings pattern to growing financial literacy, aggressive product selling by insurance companies and seeking of better investment returns.

“The data clearly reflects greater awareness of financial products,” Ranjeet Mudholkar, CEO of Financial Planning Standards Board India, told HT. “Plain bank deposits cannot match the returns given by several other products. This is a welcome trend, mirroring how India is slowly becoming a nation of investors from pure savers.”

The taxability of bank deposits, low returns and longer procedural practices also appear to be deterrents.

“Post-office savings, unlike bank deposits, do not require a lot of paper work. One can deposit in cash, open multiple accounts and quoting PAN for small deposits is not mandatory,” said Delhi-based financial planner Surya Bhatia.

“Its likely that people are preferring to invest more and more of their additional disposable income in government savings products because of higher returns after setting aside a certain portion as liquid deposits in banks,” said Lovaii Navlakhi, managing director and chief financial planner of Bangalore-based International Money Matters.