Banks regret their deposit slip-up 

Annoyed by yet another cold-caller from your bank urging you, in the middle of your work-day, to park your savings in a mutual fund or ULIP to “reap big earnings”? If it’s any comfort, the banks too are bitterly regretting this intrusion.

The proverbial “chickens have come home to roost” for the lenders came following their relentless push to cross-sell third-party financial products — their deposit growth is worryingly lagging credit growth.

Even as bank back-office executives and the third parties engaged by them worked phones to sell the non-bank products to bump up fee income, they failed to display equal enthusiasm in canvassing for deposits — the main raw material for banks to do business, namely give loans.

Now they are left scrambling for resources to meet the growing demand for credit. Despite the offer of higher interest, depositors remain unenthused. Having tasted good returns through MF investments in the post-Covid period, they are in no rush to return to traditionally “staid” deposits.

In March 2017, when the Association of Mutual Funds in India (AMFI) kicked off its nationwide ‘Mutual funds sahi hai’ (MFs are right for investment) promotional campaign, the industry’s assets under management (AUM) was ₹17,54,619 crore, barely 16 per cent of bank deposits (₹111 lakh crore).

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As of March-end 2024, the MF industry’s AUM (about ₹55 lakh crore) had zoomed to about 26 per cent of bank deposits (₹215 lakh crore). The fact that investors use systematic investment plans to invest in MFs through monthly auto-debit of savings bank accounts added to the lenders’ pain.

Competition

In his bi-monthly monetary policy statement on June 7, RBI Governor Shaktikanta Das called on bank boards to rethink business plans, given the persisting gap between credit and deposit growth and the need to balance assets and liabilities.

The gap between credit and deposit growth of all scheduled banks has narrowed to about 280 basis points (bps) from nearly 600 bps a year ago, mainly after the RBI had, in November 2023, increased the risk weights on unsecured consumer credit and bank credit to non-banking financial companies (NBFCs), which moderated the credit growth in these segments.

More recently, Finance Minister Nirmala Sitharaman asked public sector bank chiefs to conduct special drives for deposits, improve customer relations, and enhance service delivery.

Referring to the growing instability of CASA (current account, savings account) deposits with the advent of walletisation, apps, internet and mobile banking and UPI in the payment landscape, SBI’s economic research team recently noted that time/fixed deposits are increasingly of shorter duration (up to three years). Despite hikes, bank deposit rates are proving no match for the handsome returns from other risky asset classes.

Dipanwita Mazumdar, Economist, Bank of Baroda, points out that the compounded annual growth rate of MFs for the past 10 years is double that of bank deposits at 20.5 per cent. 

Moreover, with the growing love for MF investments, the cycle of lagging bank deposit growth has become entrenched.

“The past two notable cycles of MF growth exceeding bank deposit growth lasted for 28 and 15 months respectively, albeit most of it was transient and impacted by a favourable base, especially for MFs. The current cycle is 15 months and running,” Mazumdar says.

Getting mojo back

In an attempt to revive deposit growth, banks are likely to go beyond just interest rate hikes.

For example, Suryoday Small Finance Bank is mulling a 22-year tenor for fixed deposits, instead of the current 10-year limit. “The long-tenor FD product is on the drawing board. We have to take into account interest rate risk and all that. For instance, if a depositor saves ₹50,000 per month for 10-11 years, we are examining allowing systematic withdrawals, at twice the invested amount, automatically after the 11th year for another 11 years,” says R Baskar Babu, MD and CEO.

The bank also plans to launch a savings bank account bundled with health insurance and top-up cover beyond the basic floater cover of ₹3-4 lakh that a depositor may have. However, it does not intend to cross-sell insurance for commission.

Banking expert V Viswanathan suggests offering customers an interest rate concession, say 25 bps, on a personal loan if they operate a salary account with the bank.

Another incentive could be the offer of sweep facility for senior citizens who maintain bank balance above ₹1 lakh, he says. In addition to the savings bank interest earned up to the cut-off point, balances above it will earn fixed deposit interest. Any withdrawal beyond the cut-off will be treated as savings bank withdrawal and the fixed deposit amount will be redrawn.

As the savings bank interest rate is deregulated beyond ₹1 lakh, banks can choose rates for different slabs of average balance maintained. Banks can also enrol customers under PM/CM health insurance schemes, he says. Raising deposit insurance coverage beyond the ₹5 lakh limit can prove attractive, too.

VRC Reddy, Head-Treasury, Karur Vysya Bank, observes that banks are turning into transaction routers from traditional keepers of the country’s savings. “The true challenge is in mobilising deposits at a lower cost, as alternative channels offer higher returns,” he says.

RBI Deputy Governor M Rajeshwar Rao recently mooted periodical hikes in the deposit insurance coverage limit, in accordance with factors such as growth in bank deposits, the economic growth rate, inflation and increase in income levels.

Perhaps it’s time for banks to assert, “Bank deposits sahi hai.”