Banks Battle for Deposits: Small Savings Schemes Intensify Rate War

• Indian banks face a significant challenge in raising deposits, as growth lags behind credit demand, creating a "rate war" on the liability side.
• Small savings schemes like PPF, Sukanya Samriddhi, NSC, and Kisan Vikas Patra offer high, unchanged returns (7.1%-8%+) for eight consecutive quarters, backed by sovereign assurance and tax benefits.
• Deposit growth (9.4%) is significantly slower than credit growth (11.9%), with deposits even contracting by Rs 1.7 lakh crore in mid-December, while credit expanded.
• This divergence, exacerbated by weak post-tax season liquidity rebound, forces banks to rely on temporary fixes like RBI borrowings and paring investments.
• Small savings rates act as an informal benchmark, limiting banks' flexibility to cut deposit rates and compressing their margins, despite monetary easing.

Why It Matters: Banks struggle to attract deposits due to high-yielding small savings, impacting lending capacity and margins.