Demonetisation has forced people to park their expired currency and excess cash in their bank accounts. Now banks have huge cash deposits due to this demonetization drive and probably struggling with the excess cash flow and few avenues to deploy the same.
With limited credit offtake, presently there are very few opportunities for banks to deploy these surplus funds. Banks have opted for government bonds to invest this surplus cash which led to spike in the government bond prices. As you know, presently your savings bank account offers about 3.5% to 4% interest, while FDs offer about 6 – 6.5% interest rate. Banks offer this depositors money to borrowers under various loan products such as home loan (9% – 10%), personal loan (12% – 15%) at higher interest rates to earn income from the same.
