PSU banks lose ground in low-cost deposits

Public sector banks have always enjoyed the people’s trust. But going by data put out by the RBI, this appears to be gradually changing. Their share of total deposits in the banking sector has dropped by 2 percentage points over the last 10 years. And the bulk of this loss has been in low-cost demand deposits.

The figures are a lot more worrisome when you consider SBI (with its associates) alone. India’s largest bank has seen a 4-percentage-point decline in its total deposits market share over the last decade. From 26.8 per cent in March 2005, SBI’s share had shrunk to around 22.8 per cent in December 2014.

While PSU banks still hold about three-fourth of all deposits, private sector banks have slowly gained market share thanks to their efficiency, service quality, retail push and use of technology.

State-owned banks have also lost their stronghold where it matters the most — in low-cost demand deposits.

Deposit accounts are broadly categorised into time and demand deposits. The former essentially refers to fixed deposits, while the latter category includes current and savings accounts.

PSU banks have lost a whopping 8.8 percentage points in share in current and saving deposits. This has hurt their profitability as demand deposits are a low-cost funding option for banks.

Customers usually have savings accounts with the bank they frequently transact. Hence, the ease of day-to-day transactions, technology and servicing are key factors that customers look at while opening a savings account.

Similarly, for corporate entities that maintain a current account, a composite offering for transactional banking, including cash management, is vital.

“Private banks have expanded their branch presence significantly over the last few years and have a higher proportion of their branches in the metros compared to public sector banks. In these cities, they offer better services to their depositors driven by productivity-linked incentives to employees. This has impacted the business of public sector banks,” says Rajat Bahl, Director, Crisil Ratings.

Private banks have also scored better than their public sector peers when it comes to current accounts, which are transactional accounts. “The wide range of products that private banks offer caters to the need of businesses far better,” says Bahl.

But he adds that outside of metros, PSU banks continue to enjoy a larger share of the longer tenor deposits given the preference of these depositors to stay with PSU banks for longer time-horizons. This may explain why nationalised banks — excluding SBI — have seen a 2 percentage point increase in share of fixed deposits in the last decade.

But SBI has lost ground in both demand and fixed deposits. Its share in demand deposits has fallen to 15 per cent, from about a fifth in 2005. It has also lost a 4-percentage-point share in fixed deposits. Private banks have outpaced SBI in the metros. But SBI has a relatively stronger presence in semi-urban and rural areas and the deposit growth here has been slower than in metros, because people have been switching from financial to physical savings, according to market players. This explains the erosion in SBI’s overall market share.

Being relatively better placed on the funding side, SBI also has the option to pick and choose the type of deposits it wants, say experts.

Hence one of the reasons for the lower share in deposits can also be because SBI decided to pass some deposits up. SBI offers 25-50 basis points lower rates on its one-three year deposits than other leading PSU banks. This is indicative of lack of pressure to garner deposits, especially in the current environment of muted credit growth.

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