The Hindu Business Line : Why banks must aim for a healthy deposit mix

In the Annual Policy statement for 2006-07, the Reserve Bank of India (RBI) expressed concern over banks resorting to more non-core bulk deposits from corporates than laying greater emphasis on mobilising core retail deposits from customers.

The issue came up for review by the Finance Minister during his meeting with the chief executives of public sector banks recently, indicating that high-cost bulk deposits need to be contained and replaced by a steady growth of retail deposits.

In 2005-06, the time deposits of scheduled banks rose 20.12 per cent, against 13.5 per cent in 2004-05. The central bank attributed this jump to the spurt in short-term wholesale deposits up to one-year maturity at rates that were bid up to a range of 8-8.5 per cent.

Deposits secured at high rates cannot sustain a higher credit demand and could have adverse consequences for balance-sheet management and profitability, according to the apex bank. The asset-liability mismatches are bound to widen on account of this lopsided development, impacting the bottomlines of banks' balance-sheets — the main barometer of their functional efficiency.

The majority of such deposits are normally mobilised during March to sustain the balance-sheet's health. This increases the demand for deposits, which are taken at exorbitant rates, not consistent with banks' deposit policy guidelines. Admittedly, there have been instances of corporates indulging in interest rate arbitrage, which is a losing proposition for banks in both ways — lending and deposit taking. Interestingly, from just 3-5 per cent of term deposits a few years back, the share of bulk deposits has ballooned to as much as 20-30 per cent for many banks. Banks have been mopping up large bulk deposits in their efforts to meet a set target in the deposit base. Further data for 2006-07 reveals that nearly 44 per cent of aggregate deposits of scheduled commercial banks (SCBs) was mopped up from January to March.

The targeted increase in deposits requires that banks enlarge their credit base. One of the main challenges before the banking industry is to change its mindset regarding deposit mobilisation. Banks have to consider shifting the focus from size-related business to efficient and profit-oriented opportunities through a prudent and judicious deposit mix. Under a target-oriented dispensation, there is a growing tendency, as the statistics reveal, to reach the goalpost at the base unit levels with bulk deposits and remain complacent, rather than tap the potential for retail deposits. This also effectively camouflages the underperformance of base units in the area of mobilisation of core and low-cost deposits, putting the net interest margin under considerable strain.

Banks do realise the deleterious effects of being bulk-deposit dependent at deplorably high rates, but are seemingly helpless. Appetite for volumes to prop up the top-line of the balance-sheet puts banks in an unenviable position and push them into a vicious circle.

There is no gainsaying that banks have to better their top-lines year on year and remain in the race.

But the mere pursuit of high-cost deposits can hardly be a solution, for it defeats the fundamental purpose of banking and negates the goal of being a truly commercial entity if the bottomline gets weaker, making operations unviable.

The situation calls for bold initiatives by the consortium of banks to shed high-cost deposits as a one-time move, and concentrate on leveraging the vast untapped potential for retail deposits from rural/semi-urban locations which will be a sustainable proposition. This reality check, though seemingly formidable, will help banks to rebalance their viability factors.

(The author is a former General Manager of Canara Bank.)

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