Imagine the 100-m dash at the Olympics, where the starting pistol gets fired and, yet, Usain Bolt and Richard Thompson stand pat without moving off the blocks.
In a sense, this is the status of a race that has not really taken off more than six months, since the Reserve Bank of India (RBI) freed the interest rates banks could offer on the Savings Bank (SB) deposits with them.
Barring sporadic attempts by the likes of Yes Bank (SB deposit base Rs 700 crore) and Kotak Mahindra Bank (SB deposit base Rs 3300 crore) — not exactly the Usain Bolts and “Torpedo” Thompsons of the Indian banking world — the market is still to respond to the RBI policy move.
And this in a year, where overall deposit growth, including that of SB accounts, has been sluggish.
In 2011-12, Indian banks put together recorded a deposit growth of about 13.4 per cent, against a credit growth of 17.1 per cent.
The overall incremental credit-deposit ratio worked out to as high as 96 per cent. Perhaps, this is what spurred the Chairman of State Bank of India, Mr. Pratip Chaudhury, to recently state: “I will be genuinely concerned about deposits growth as bank deposits are getting crowded out because of other competing savings instruments”.
These comments are also borne out by the accompanying chart, which shows that the deposit growth during the last fiscal was the lowest in the last nine years.
The RBI has projected aggregate deposits to grow by 16 per cent during 2012-13. While credit off-take growth projections, at 17 per cent, seem achievable, the big challenge lies in deposit mobilisation.
COMPETING INSTRUMENTS
Are bank deposits losing their shine? Is the status-quo on the SB interest rate front reflective of a larger lack of product innovation in deposit mobilisation among Indian banks, thereby making customers gravitate towards other contra instruments of savings?
During a period when the real rate of return on deposits has been negative — in the case of SB accounts, the negative carry on a Consumer Price Index-based inflation rate of 9.5 per cent would work out to over 5 per cent — it would be least surprising to find households opting for other competing instruments to invest their savings.
But apart from inflation, the lower growth of bank deposits could also have been linked to a slowing economy, resulting in lower growth in incomes and household savings.
As per RBI estimates, households account for nearly two-thirds of gross domestic savings in the country. While nearly half of these household savings are in the form of financial assets (as distinct from physical assets), 50 per cent of the financial assets are in the form of bank deposits.
Thus, one can logically assume the share of bank deposits in the country's gross domestic savings at about 15 per cent (2/3x1/2x1/2).
It goes without saying that India is to raise its investment rate and this is to be financed largely through domestic savings — the alternative is running huge current account deficits, which are another name for foreign savings — the importance of bank deposits as a conduit for mobilising these savings cannot be overemphasised.
The big trial for Indian banks this year and the years ahead would be to continue to attract domestic savings. Here, they will face competition not only from other financial instruments, but also from physical forms of holding wealth such as gold and real estate.
RELATIONSHIP BANKING
Product innovation would be the key for banks in this task. Nurturing of relationships, by which the public perceive advantages in maintaining SB and other deposit accounts with banks, would be an imperative.
Most banks now, for instance, do not differentiate between someone who has been an SB account holder with them for, say, 30 years, from another who has just opened an account.
There could be ways of re-pricing services like locker rentals and remittance charges for customers with such long relationships. This is despite the RBI's mandate of SB and other deposit interest rates being uniform across all classes of depositors.
Even while adhering to this directive, there could be ways of building a model for rating of depositors, akin to the credit-rating of borrowers. That would enable other services, such as renting out of lockers, remittance charges and even processing charges on retail loans, to be priced appropriately, depending on the total relationship value that a bank would have with individual depositors. One would suggest a simple four-dimensional rating model for depositors here, with four broad components covering the ‘length', ‘breadth', ‘strength' and ‘depth' of relationship of banks with individual depositors. While this model (see graphic) is admittedly crude, the emphasis here is on developing differentiators among depositors so that relationships are aptly priced.
All this only highlights the importance of product innovation, which has been a non-priority area for Indian banks historically and also the hangover of a regulated market.
May be, the time has also come for the banking industry to consciously spend on research & development to evolve products that can compete with other savings instruments and relevant to local consumer needs.
With net profits of about Rs 61,000 crore (March, 2011 figures), even a half per cent spend by the industry on product innovation would amount to Rs 300 crore. Surely, it is worth the cost. For, what is at stake is not merely the growth in bank deposits, but the interlinked issues of gross domestic savings, investments and even the current account deficit.
(The author is with State Bank of Mysore. The views are personal.)