Window-dressing of deposits by banks: Some truths

Window-dressing is one of the uncomfortable phenomena in the Indian banking system. The financial status of banks is evaluated every quarter (March-end, June-end, September-end and December-end).

At these points of evaluation, banks try to boost their deposit figures through artificial means. However, the make-up does not last long. The deposit figures start dropping in the ensuing weeks till the attainment of a natural height. The paradox to be noted is that window-dressing is artificial, whereas window-undressing is quite natural.

In spite of being transitory, window-dressing has become a common and normal practice among bankers and an integrated feature of the system so much so that the quarterly figures of deposits are always accepted with a pinch of salt.

All banks window-dress; only the degree differs.

RBI’s Concern

The phenomenon of window-dressing continues despite the RBI’s warningsand suasion. The RBI’s concern is evident from its Business Season Credit Policy, 1995.

To quote, “Banks have been repeatedly warned to eschew window-dressing and it is unfortunate that despite strong suasion this warning has been ignored. Banks are cautioned once again against the recurrence of such a phenomenon and I am constrained to say that we may have to evolve certain arrangements, including punitive action, to prevent the recurrence of such a phenomenon.” (Paragraph 5 of the RBI Governor’s letter to SCBs on September 29, 1995 detailing the Busy Season Credit Policy)

The RBI Annual Report 1998-99 cited window-dressing of deposits as one of the factors contributing to the “hardening of call rates”.

The RBI Bulletin of May 2000 refers to window-dressing causing “year-end bulge”. In his speech titled, “The Evolution of Banking Regulations in India – A Retrospect”, one of the then RBI Deputy Governors, V. Leeladhar, characterised window-dressing as “prudentially undesirable.” (RBI Bulletin, May, 2007)

Why Undesirable?

Window-dressing is undesirable because it introduces distortions in monetary and banking aggregates and, thereby, affects the process of monetary and banking policy and planning adversely.

Moreover, it makes the bank officials concerned complacent about making real efforts to mobilise ‘stable’ deposits. Of late, it is being realised that deposit mobilisation is often more effort-elastic than anything else. Window-dressed deposits are rather fickle.

Reasons

Over time, the Indian banking system has become more competitive. Not only there is stiff competition among banks to grab public deposits but also they have to compete against non-banks offering attractive returns. In contrast, the savings potential of the country has been varying in a limited range. The following graph illustrates that the country’s financial savings as a percentage of GDP at CMP has been hovering around 10-13 for the past seven years. (Source: Economic Survey 2011-12, pp.5, Table 1.4). A roller-coaster ride, indeed!

Thus, there is a classical economic problem: Limited resources and unlimited competitors. The demand for of the latter is not only high but urgent and swift as well. In such a situation, those who can plan and execute the plans effectively to get a major chunk of savings can actually increase deposits; but those ‘career-conscious’ aspirants who fall short resort to window-dressing.

In the above framework, one pertinent question arises. Why do bankers aspire for deposits and deposits alone, when there exist so many other performance indicators? Even if banking has come a long way, still the emphasis is on ‘growth’ and within ‘growth’, deposit figures are being focussed first because banks are basically ‘special’ financial intermediaries, and deposits are their raw materials for credit creation. This stark reality cannot be just wished away.

Banks sign a memorandum of understanding with the Finance Ministry, Government of India that benchmarks the performance of bank Chairman and Managing Directors (CMDs) against certain parameters, within which ‘growth in business (deposits and loans)’ figures prominently. If banks attain their targets agreed upon, CMDs get a bonus. This is the starting line for hounding ‘growth’.

The process is replicated at the micro-levels of the hierarchy where first and foremost, growth in deposits shown by incumbents at various levels is taken as a significant performance indicator.

In view of this, a blanket target-oriented approach is followed in mobilising deposits. The targets are fixed from the top on an increasing trend basis irrespective of various endogenous and exogenous changes the operating area might have undergone or might be experiencing during the time interval of the last and forthcoming evaluation points.

Generally speaking, there is a lack of gradual, continuous and systematic efforts to mobilise deposits because of stationary nature of the evaluation points.

Towards the evaluation points of time bankers receive a spur and run around to get deposits. And haste makes waste.

The Ultimate Truth

Like risk, window-dressing can only be minimised, but not eliminated. Let us accept the reality that so long as ‘growth’ is focussed in evaluation of financial status of banks, window-dressing will continue. All the stakeholders in the process of evaluation should be ‘deprogrammed’ from their obsession with ‘growth’.

Evaluation should include other parameters pertaining to a bank’s efficiency, safety and soundness, staff productivity, financial inclusion, technology and the like as determinants of achievements and a simple, weighted index needs to be developed to calibrate a bank chief’s performance. This is a challenge for the Finance Ministry which should constitute a committee with representations from stakeholders to devise the index.

(The author is a former commercial bank economist)

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