The Hindu Business Line : Banks find India Post a tough rival in deposit mop-up

The rates on deposits offered by SBI and other banks are at least 0.75 percentage point to one percentage point lower than those offered by India Post.

Bangalore , July 5

BANKS are faced with intense competition. Not from fellow banks, but from India Post, which has become aggressive in mobilising savings.

Bankers say the competition has already impacted their deposit mobilisation efforts. There is a large interest rate differential between the postal department and the banking sector. Postal savings currently offers 6.25 per cent for one-year deposits and 7.5 per cent for five-year deposits.

Public sector banks and State Bank of India's deposit rates are at least 0.75 percentage point to one percentage point lower than that offered by India Post.

Bankers said that as a result, term deposits' accretion into the banking system has considerably slowed.

Outstanding time deposits of the banking sector for the latest fortnight was Rs 16.82 lakh crore or a year-on-year growth of 13.2 per cent. Accretions to the postal savings schemes last year were about Rs 70,000 crore and the outstanding for the last fiscal was Rs 2.54 lakh crore, which is larger than that of the largest bank in the country.

Besides, bank deposits, since the beginning of this year, had grown at a slower pace than advances, bankers said. And, a credit growth of 33 per centwas also one of the major factors leading to a high incremental credit-deposit ratio, said bankers.

Incremental credit-deposit ratios are in the region of 100 per cent, though some of the banks are operating at even higher credit-deposit ratios.

So far banks were funding the high incremental credit-deposit ratios through liquidation of excess investments. The banking system has investments in gilts of close to 44 per cent of their deposits. This is way above the prescribed statutory liquidity ratio of 25 per cent. But some of the banks have already reached the 25-per cent level, bankers said.

Accordingly, it is these banks that would have to resort to deposit mobilisation efforts.

But banks are faced with difficulties in raising long-term deposits in view of the differential deposit rates. For bankers, offering high interest rates on the same lines as India Post is a major problem.

This is because some prime customers are already borrowing at rates equivalent to the deposit rates offered by India Post.

Besides, offering higher deposit rates without a concomitant increase in lending rates would imply shrinking spreads. As a result, bankers said that most of the deposit accretions were taking place at the maturities below one year, since the postal department does not offer tenors below this period. Consequently, customers prefer to have six months or even 90-day deposits and rolling them over at the end of the term.

Such a situation, bankers admitted, created possibilities for asset-liability mismatches.

This is particularly so in cases where bankers are expected to put in funds for long gestation periods in excess of 20 years. Most bankers, however, are used to living with asset-liability mismatches.

In fact, this is the least for their worries. The major worry is that the postal department rates are leading to an erosion of banks' customer base.

The postal department now wants to make retail loans to customers, especially in rural areas.

That would knock the rural lending business of the banks, the most lucrative portfolio of the public sector banking industry.

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