In the failure of the Silicon Valley Bank recently, in addition to the interest rate risk, the concentration risk played an influential role, as the bank serviced start-ups in a big way.
In general, the concentration risk arises from “imperfect diversification.” All the items in a bank’s balance sheet are vulnerable to concentration risk. However, in the literature, this ‘unusual’ risk has received considerable attention in relation to credit portfolios because, historically, the concentration risk in credit portfolios has led to instability in individual banks as also the entire financial system.
Several banks incurred huge losses following failures of ‘lumpy’ loans like Enron, Worldcom and Parmalat. Studies also attribute the sub-prime crisis to concentration of mortgage loans among low- and middle-income groups in urban areas.
But there is a research gap on the extent of concentration risk in deposit portfolios of Indian banks.
Applied to deposit portfolios, concentration would mean large amounts of deposits in a few classes of depositors that may include institutions or corporates or ultra-high net-worth individuals. Such deposits are considered as potentially volatile as their owners , while receiving higher interest rates but not maintaining a stable relationship with the bank can walk out anytime, if interest rates decline, or if they are offered higher rates by another bank.
At the slightest sign of weakness, these high net-worth individuals are the first ones to exit a bank which may trigger panic.
A few big depositors exiting, despite the bank remaining safe, may possibly lead other depositors to question the bank’s financial health.
According to press reports, after the Lehman collapse in 2008, in India, a major corporate transferred ₹10 billion deposits from a private bank to a Public Sector Bank (PSB). After this news came out, long queues were seen outside the private bank’s ATMs in major cities, even though the bank was sound.
Sudden and large disruptions in deposit portfolio of a bank “increases the probability of erosion of a bank’s liquidity position … that would increase the risk of its failure and potentially lead to broader systemic stress.” Further, depending on the maturity buckets of deposits that are affected by such withdrawals, asset-liability management risk may also kick in.
The deposit portfolios of Indian banks are mostly ‘retail’ even though RBI allows acceptance of ‘bulk’ deposits (i.e., single INR term deposits of ₹20 million and above). Bank balance sheets disclose the share of their 20 largest depositors’ deposits in their total deposits. Our analysis takes this ‘share’ as an indicator of concentration risk in deposit portfolios.
Table 1 presents the salient results of our analysis at March-end 2022 for 33 scheduled commercial banks comprising 12 each of PSBs and Old Private Banks (OPvBs) and nine New Private Banks (NPvBs).
Highlights of findings
* In aggregate, the ‘share’ of the top 20 depositors in total deposits stood at 6.4 per cent in the 33 banks surveyed (with range from 3.2 to 21.4 per cent). While 12 banks had the ‘share’ at 10 per cent and above, the rest 21 had it at 10 per cent and below. However, the average share of the top 20 depositors in the former category was not much above the 10 per cent threshold, at 13.2 per cent.
* The ‘share’ was the lowest for PSBs (5.9 per cent) followed by OPvBs (7.3 per cent) and NPvBs (7.7 per cent). More OPvBs and NPvBs had a share at 10 per cent and above than PSBs.
These results tell us that the concentration risk in the deposit portfolios of Indian banks can be said to be ‘low’ to ‘moderate’. However, speaking individually, two banks (one each in the OPvB and NPvB groups) had the ‘share’ at 20 per cent and above — their concentration risk was relatively high. One way to mitigate the concentration risk in the deposit portfolios is to ensure that the large depositors maintain a durable relationship with the bank. Further, funds management policies and strategies of banks should focus on active monitoring of deposit concentrations, potentially volatile clusters and simultaneous maturing of large deposits.
The key monitoring variables should include amplitudes of variations in deposit inflows/outflows and low interest spreads that may be associated with bulk deposits. Supervisory authorities during their inspections should also take note of deposit concentration. Rumours of a bank facing considerable withdrawal pressures must be countered by the management by coming out immediately with necessary disclosures and clarifications.
Although Indian banks should preferably continue to focus on retail deposits, but that should not be their sole focus, given the costs it may entail huge costs. Therefore bank managements should strike an optimal balance between retail and bulk deposits.
Das is a former senior economist of SBI. Views are personal.