The mystery behind the Rs 3 lakh crore deposits in 15 days

The second fortnight of September saw Rs 3 lakh crore of time deposits, something unique, followed by liquidation of Rs 1.2 lakh crore of these right after, report Business Standard's Ishan Bakshi and Nitin Sethi.

From September 16 to 30, a staggering Rs 3.03 lakh crore of time deposits -- fixed and recurring -- were made at banks.

This has never happened in any fortnight since January 2001.

September 16 is also the date from which the Reserve Bank India, in a rare later decision, chose to implement an incremental Cash Reserve Ratio rule of 100%, retrospectively.

The RBI said this was done to impound additional cash flowing into banks, assessing the impact of demonetisation, which was announced only on the night of November 8.

Clearly, then, the RBI was aware that enough deposits -- liquidity in bank parlance -- were available with banks from September 16.

What is also intriguing is that in the fortnight after September 30, as much as Rs 1.2 lakh crore of time deposits were liquidated. This is again unprecedented.

More, these liquidated deposits do not show up in saving or current accounts in the fortnight report of October 14. In fact, these latter deposits also dipped by Rs 1.22 lakh crore over the same fortnight.

To understand this, Business Standard sent detailed queries to the ministry of finance and the RBI, on these series of exceptional deposits and withdrawals. Neither replied.

Some official explanations have come. Yet, some senior economists and bankers have asked either for investigations or more factual detail.

Finance Minister Arun Jaitley dismissed these exceptional deposits as a 'marginal spike', attributing it to dispersal of Pay Commission arrears from August 31 to September 15.

He rubbished suggestions that these deposits were a result of news about the coming demonetisation leaking out.

Jaitley's justification can at best explain a fraction of the increase in deposits. The payout on account of the Pay Commission till the first week of September was roughly Rs 45,000 crore, according to the chief economic advisor of the State Bank of India, and Rs 34,600 crore, according to a study by India Ratings and Research.

More, these payouts would first be transferred to employees' salary accounts and should, thus, first reflect in an increase in demand deposits.

Even assuming every beneficiary converted this windfall into time deposits, the explanation falls short.

SBI Chairman Arundhati Bhattacharya, while speaking to NDTV, gave a similar explanation as Jaitley did. She also cited the higher military pension payout (One Rank, One Pension) and the annual phenomenon of people breaking their term deposits during the Ganapati festival around this time to justify the spike.

However, adding, that because of the demonetisation rush, she had not had the time to look carefully at September deposits.

In absolute terms, the Rs 3 lakh crore jump in deposits (3.2% higher than in the previous fortnight) is exceptional even after taking these averments into account.

The previous highest increase in time deposits over a fortnight was Rs 1.79 lakh crore on April 8, 2011.

In percentage terms, fortnight on previous fortnight, there have been only three other occasions that term deposits have jumped by more than three per cent.

The highest was of 4% (fortnight on fortnight) in the fortnight ending May 3, 2002; however, the amount was significantly lower, at Rs 44,700 crore.

The average increase in deposits in September over the last 12 years is typically around Rs 1 lakh crore.

This time, it has risen by Rs 287,118 crore.

Bhattacharya's colleague, Soumya Kanti Ghosh, the CEA at SBI, contradicts her claims. He had as early as March 2016 written that the government was possibly working towards demonetisation, saying rural India was seeing more of Rs 100 notes than of Rs 500 and Rs 1,000.

Dr Raghuram Rajan, the former RBI governor, during whose tenure this trend was captured, did not respond to queries on this issue. But records show that as early as May, the RBI was pushing banks to install ATM machines solely for Rs 100 notes.

In an official report, Ghosh says the trend increase in aggregate (both term and demand) deposits and the pay commission account for, at best, 70% of the month's increase in deposits in September.

Ghosh does not look at the fortnightly data, which would have shown spikes in both deposits and withdrawals.

He hypothesised that the balance amount, Rs 85,818 crore, came from people making deposits to avail of lower tax rates under the usual annual income tax return, as compared to the 45% imposed under the first income disclosure scheme (IDS) which ended on September 30.

However, another top official at SBI is unsatisfied with his colleague's explanation. "I don't think anyone can have a conclusive answer unless he has access to data on large deposits. I saw the report from SBI's chief economist, saying that it can partly be explained by IDS; I don't think it is a full explanation," he says.

A joint managing director of a large private bank said the explanation was "far-fetched." Neither wished to speak on record.

Banks do not reveal data of who made deposits or to whom loans were given, as part of their fiduciary relation with clients.

The most innocuous explanation for this jump rests upon when the RBI captures the data.

The RBI collates fortnightly data from banks ending on Fridays.

The second quarter ended September 30 was a Friday, when banks sent their fortnightly data.

"Possibly, the unusual jump was captured in RBI reports because the quarter ended September coincided with the particular day of the fortnight that RBI captures data -- a Friday," says the chief economist at a private bank.

This does seem to fit with the explanation offered by some others. Madan Sabnavis, chief economist at CARE Ratings, says: "One reason could be the seasonal factor, where banks meet targets, which then fall as (short-term) corporate deposits mature."

The JMD of the large private bank Business Standard spoke to did concur. "Quarter end, banks want to show a higher deposit base. Customers draw down limits and make deposits. Once the quarter is over, these are liquidated again. It is not an abnormal move. Close to a quarter end or half-year end, there are a lot of redemptions from mutual funds (MFs). It lies in bank deposits. Then, post the quarter end, it goes back to the MFs."

"There have often been such temporary spikes in deposits and credit offtake during the last reporting fortnight of some quarters, which might be on account of window dressing by some banks," agrees Aditi Nayar, senior economist with ICRA.

However...

Business Standard reviewed past data. Sharp spikes do occur in term deposits around quarter ends, particularly at year ends. But these have never been as large as this September.

In the quarter ending June, time deposits grew by Rs 1.04 lakh crore.

On April 1, they had grown by Rs 1.54 lakh crore.

However, such quarter-end surges have remained in the range of Rs 1 lak crore to Rs 1.5 lakh crore.

To examine the explanation of MF redemptions, we also looked at data put out by the Association of Mutual Funds in India.

These show that net inflows in liquid funds actually increased by Rs 19,630 crore in September; in income and gilt funds, it declined by Rs 11,024 crore and Rs 961 crore, respectively.

These diverse hypotheses have led some to demand greater detail and even investigation. Pronab Sen, former chief statistician to the government, says: "This should have been investigated then and should be investigated now. As far as I know, it is unprecedented. I can't think of any event which would have led to it."

An ex-board member of the RBI, Vipin Mallik, is of the same mind. "In my experience, whenever there has been a scale disproportionate to trend, it is a case for investigation."

In the shadow of few details, hypotheses multiply. There could have been a surge in remittances from abroad in this period.

As data for the September quarter on remittances are yet to be released, one cannot be certain.

Foreign institutional investor flows could account for part of the increase but the net investment was $1.4 billion in September.

The other oddity is the liquidation of Rs 1.2 lakh crore of term deposits in the subsequent fortnight.

A possible explanation is redemption of FCNR deposits in this period. "A large part of the Rs 1.5 lakh crore term deposits that were liquidated were outflows on account of the FCNR scheme" says SBI's Ghosh.

It is also possible that part of this was withdrawn on account of the festive season, some suggest.

Yet, past data shows the amounts withdrawn annually during the festive season are significantly lower.

At the fortnight ending October 16, 2015, only Rs 42,700 crore was withdrawn.

In percentage terms, too, the withdrawal was the highest this year.

Possibly, all these explanations can add up to explain the surge in deposits and withdrawals. Without details, it is difficult to draw either a conclusion or consensus.

With inputs from Abhijit Lele