Of banks and ebbing deposit flows

Commercial banks’ deposits expanded by 6.7% in FY18, the lowest growth rate in more than 5 decades

June 24, 2018 09:26 pm | Updated 09:26 pm IST

Of late, Indian banks have come up against a problem that they’ve seldom had to face over the last two decades — having too few takers for their fixed deposits.

RBI data showed that in the financial year ended March 2018, aggregate deposits of scheduled commercial banks expanded by 6.7%. That’s the lowest annual growth rate recorded in over five decades. Over the last two decades, banks have been able to expand their deposit base at an average rate of 16% a year.

It would be tempting to attribute the ultra-low growth in FY18 to the high base effect caused by demonetisation. After all, the second half of FY17 saw an unusual deluge of deposits into banks triggered by the ban on high-value currency notes. This propped up bank deposit growth to 15.3% in FY17. But if you exclude this as an aberration, new deposits flowing into banks have been on a decline since FY15.

RBI data showed that in the nine years from FY05 to FY14, bank deposits saw a massive surge in their popularity. Net inflows into banks grew more than four-fold during this period, from ₹1.95 lakh crore in FY05 to ₹9.55 lakh crore in FY14. But the juggernaut was halted in FY14. New deposit mop-ups dipped to ₹8.27 lakh crore in FY15 and further to ₹7.94 lakh crore in FY16. The note ban offered a temporary breather by drawing back ₹14.3 lakh crore into banks in FY17. But the flows have ebbed quickly thereafter, to just ₹7.17 lakh crore in FY18.

Why the decline

What has caused Indian savers to lose their long-held affinity for bank deposits? Well, one obvious reason is diminishing returns. Historical trends suggest that inflows into bank deposits carry a high correlation with interest rates. FY05 marked a low point in interest rates in the economy, with 1 to 3-year bank deposits offering 5.25%-5.75%. Rates climbed steadily to 9.25% by FY12 and stayed put until FY14. Thereafter, as a slowing economy forced RBI to prune policy rates, deposit rates slumped to 6.75% in FY18. Deposit mop-ups by banks have followed a similar trajectory.

The hunt for better returns has prompted savers to actively seek out market-linked alternatives to bank deposits. Savers have upped their allocations to NBFC deposits, which have seen a fourfold rise in their deposit base in the last four years. More significantly, with the stock markets taking wing from FY14, retail savers have been making a beeline for equity mutual funds which delivered a 15-20% return between FY13 and FY18.

From pull-outs of ₹11,000 crore in FY14, equity funds attracted more than ₹80,000 crore in net inflows in FY15 and went on to amass ₹2.6 lakh crore in new flows in FY18. A rising number of those investors are also signing up for monthly investments with systematic investment plans (SIPs) now funnelling over ₹7,000 crore a month into mutual funds. Debt funds have emerged as more tax-efficient alternatives to bank deposits too.

PSBs hit most

But a third and far more disturbing reason for savers shying away could be the relentless adverse news flow about bad loans, capital adequacy woes and multi-billion rupee frauds, that have kept bank depositors on the tenterhooks in the last three years.

It is public sector banks (PSBs) — the most hit by these problems — that have seen their deposits dry up the most. In FY18, PSBs managed a minuscule 3.1% growth in their aggregate deposit base. But private banks saw a brisk 17.4% growth in deposits while regional rural banks managed a 7.2% increase. Newbie small finance banks, which offered high rates, managed a fourfold jump in deposit base in one year. With consistently better deposit growth, private banks have seen their share in aggregate deposits shoot up from 21 to 27% in the last four years while PSBs have seen their share plummet from 73 to 67%.

Dwindling deposit flows into banks have significant repercussions for the economy and banks themselves.

One, it is credit that oils the wheels of the economy and as the economy revives from its slumber of the last three years, banks may find it difficult to bankroll the credit needs of industry. This may impede industrial revival. In the ten years to FY17, the annual increase in deposits for banks easily outpaced additional demand for credit each year. In FY17, thanks to the riches from demonetisation, new deposit flows exceeded the incremental loan offtake by a massive ₹8.4 lakh crore. But in FY18, the tables turned drastically, with deposit flows falling short of incremental credit demand by about ₹91,000 crore. While deposit growth has slumped lately, credit growth has accelerated from the single to double digits. Yes, as banks have scrounged for funds to lend, bond markets have stepped in to bankroll industry. But given the lack of breadth in the Indian bond market, the market route is open only to large corporates with high credit ratings. For lower-rated companies, MSMEs and sundry small borrowers, a cutback in bank lending usually means a squeeze on credit availability.

Two, the funds crunch has forced banks to step back from lending to the government too. Domestic banks, to fulfil their statutory liquidity ratio (SLR) requirement, are required to compulsorily park 19.5% of their deposits in government securities. This requirement allows the Central and State governments, which survive on deficit financing, to periodically dump gilts on banks to raise money. But after indulging in a gilt buying binge in FY17 and overshooting their SLR requirements, banks have found no reason to buy more gilts in recent months. This has this sent borrowing costs for the Centre shooting up (it topped 8% recently), and raised concerns about how the Centre or the States will successfully complete their borrowing programmes this year.

Three, banks have also been constrained by their rising stockpile of non-performing loans. With ₹10 lakh crore of bank funds locked up in NPLs and sluggish recoveries, banks’ hands have been further tied in expanding their loan book.

This poses a Chakravyuha -like problem for banks. Expanding their loan book of healthy borrowers is the fastest way for beleaguered banks to ‘grow’ out of the NPL mess. And, it is by lending to non-government entities, that they can earn the high yields that cushion their profits from the rising bad loan write-offs. But both of these require healthy deposit flows, which are eluding the needy banks the most.

The way out

So, can banks now woo back savers with higher deposit rates? They have certainly been trying in the last six months, by pegging up their deposit rates far more rapidly than RBI’s policy rates. Conveniently for them, the stock markets have also lost some steam, sharply pruning equity fund returns. But RBI data for the first two months of FY19 doesn’t indicate a material turnaround in deposit flows.

It is too early to conclude that domestic savers, vexed with the adverse news flow from PSBs, have shifted their loyalties for good. But given that market conditions are now favouring banks over equity avenues, this is the time for both banks and the government to try their level best to woo back skittish depositors and rebuild the domestic savers’ confidence in the banking system. Else, PSBs may permanently lose out on the precious deposit base that is the bread and butter of their existence.

0 / 0
Sign in to unlock member-only benefits!
  • Access 10 free stories every month
  • Save stories to read later
  • Access to comment on every story
  • Sign-up/manage your newsletter subscriptions with a single click
  • Get notified by email for early access to discounts & offers on our products
Sign in

Comments

Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.

We have migrated to a new commenting platform. If you are already a registered user of The Hindu and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.