Narendranath Menon
What is common to banks in Zimbabwe, Venezuela, and Turkey? Well, they all pay interest of more than 35% for deposits parked in the banks. While Turkey pays 43.5%, Venezuela pays 36% and Zimbabwe a modest 110%!!! Phew. The runaway inflation in those countries warrants a decrease in money circulation. Attractive rates of interest on deposits is seen as the solution to decrease the circulation of money and slay the monster of inflation.
Now to three voices in India that have flagged concerns of deposit mobilization of commercial banks being muted, vis-à-vis the growth of loans sanctioned.
Firstly, twice in the recent past, Governor Shaktikanta Das has expressed concerns about the sluggish deposit growth of banks. The credit growth speeding miles ahead of the deposit growth he observed could expose the banking systems to structural liquidity issues.
Secondly, Finance Minister Nirmala Seetharaman has urged banks to focus on small retail deposits that come in ‘trickles’ but are the ‘bread and butter’ of the banking system. She highlighted her nudge more colorfully, stating that deposits and lending are the two wheels of a cart, but deposits are moving slowly.
Besides the Finance Minister and the Governor of RBI, the Financial Services Secretary Vivek Joshi has voiced similar concerns. Banks have a task at hand.
Traditionally banks mobilized deposits paying depositors a certain rate of interest. In turn, banks lent those funds to others at a higher rate and derived what we call the net margin or net interest margin. The game was called intermediation. Let’s clarify with some numbers. Let’s say that the banks gave customers 5% for their deposits and charged borrowers 11%. If the costs of providing such services for the banks were 2%, the net margin (gain) for the banks would be 4%.
Today the game has changed and the name of the game is disintermediation. Erstwhile depositors can directly lend to borrowers, say at 9%. As a result, depositors get 4% more and borrowers have to pay 2% less. Clearly a win-win for the two parties. Money market instruments like commercial paper render such a win-win possible.
In a similar vein, depositors need not deposit in the bank to enable onward lending by banks to industry as traditional retail depositors can directly invest in the financial instruments issued by companies. The emergence of a robust capital market in India in recent years has diminished the role of commercial banks in that space. Thus we see that depositors have a choice of instruments in both the money market and the capital market. Further, the prevalence of a secondary market in addition to the primary market broadens the playfield for erstwhile depositors.
In this milieu, unless commercial banks craft alluring strategies buttressed with engaging communication banks will be hard-pressed to attract deposits.
Recent newspaper reports suggest that banks have upped the ante to mobilise deposits. Here again, the ability to secure term deposits rather than current deposits will indicate whether banks will be able to reclaim the deposits. While Fixed deposits and Recurring deposits give banks greater leeway over the depositor’s money, they are costlier than current accounts and savings accounts. The banks should therefore be mindful of what the banking community alludes to as the CASA ratio.
Given the diminished appetite on the part of the public to save in commercial banks, there is an urgent need for commercial banks to double down on the challenge. A few initiatives have been witnessed.
State Bank of India has launched ‘Amrit Vrishti’, a 444-day tenure fixed deposit that provides the depositor 7.25% per annum with senior citizens being given an additional .50%. Bengaluru-based Canara Bank is to open twenty-two branches in the states of Andhra Pradesh and Telangana this fiscal to mobilise deposits. Physical expansion rather than product innovation is seen as the solution to addressing the problem.
To honor the bravery and sacrifices of the Indian soldiers, RBL bank has launched ‘Vijay Fixed deposits’ offering interest of 8.1% on deposits for 500 days. Senior citizens would be given 8.6% and super senior citizens 8.85% per annum.
The financial disintermediation era has offered investors a basket of investment opportunities. The strengthening of capital markets and the digital transformation that the banking landscape has witnessed have provided to the women and younger generation of today one too many avenues for saving. Time alone will tell whether the likes of ‘Amrit Vrishti’ and ‘Vijay Fixed deposits will help banks to soldier on, win the battle, and reclaim the deposits. (The writer is Professor (Retd.), Department of Business Management, Osmania University)
