Deposit growth rate falling far below credit growth rate in public sector banks (PSBs) has become a cause for worry not only for banks but also the RBI and the Finance Ministry.
During 2020-21 to 2023-24, the compound annual growth rate (CAGR) of credit for PSBs at 14.4 per cent exceeded the CAGR of deposits, of 9.2 per cent. The phenomenon was visible across PSBs to varying extents. Consequently, the credit-deposit ratio jumped from 64.1 per cent in 2020-21 to 73.7 per cent in 2023-24.
Even the ‘demand and savings bank’ (SB) deposits to total deposits ratio fell from 41.9 per cent in 2020-21 to 38.6 per cent in 2023-24. This pattern continued in Q1 2024-25 with credit growth at 14.3 per cent vis-à-vis deposit growth of 8.9 per cent (year-on-year).
Causes for decline
As a policy, over the past few years, credit growth has been emphasised more than deposit growth. Consequently, bankers’ spotlight on deposit mobilisation has dimmed.
Use of technology for deposit mobilisation hasn’t yielded desired results. Banking, a ‘special’ business, thrives on enduring customer relationship, especially with depositors who part with their hard-earned money for some time. Thus, deposit mobilisation is effort-elastic and requires, characteristically, face-to-face interaction between the (potential) depositors and the banker, which faceless interaction via technology — which , moreover, is not trustworthy — cannot provide. Let’s examine the staff factor. During 2020-21 to 2023-24, PSBs’ staff strength declined by 1.2 per cent CAGR, despite their aggregate balance sheet size growing by 9.7 per cent CAGR. Although ‘Officers’ grew by just one per cent CAGR, ‘Clerks’ fell by whopping 3.6 per cent CAGR.
Resultantly, the ‘officer-clerk’ ratio which was as low as 100:69 in 2020-21 further deteriorated to 100:60 in 2023-24. RBI’s ‘Report on Currency and Finance 2023-24 (Table I.1)’ corroborates our observation. Since, normally, loan desks have more personnel than deposit desks, the ratio would be worse for the latter, adversely affecting deposit mobilisation and allied services.
Financial disintermediation in the form of risk-loving income earners or depositors migrating to capital market directly or through mutual funds (particularly via Systematic Investment Plans) has provided stiff competition to bank deposits. This is a natural stage in the financial development process, as investors with risk appetite chase more remunerative assets. The behavioural ‘shift’ seems unstoppable.
Consequent upon deregulation of SB interest rate in 2011, the rate varies widely over banks now, with, generally, PSBs offering much lower rates than several private banks. This has caused outflow of SB deposits from the former to the latter. Also, non-adherence to SB account terms and conditions attracts penalties to various extents. These, coupled with short-term deposits of ‘below one-year maturity’ options, have made deposit mobilisation complex and arduous, leading to bank hopping, proliferation of inoperative accounts, etc. Viewing macro-economically, during 2020-21 to 2022-23, the ‘gross household savings in physical assets to GDP’ ratio jumped from 10.8 per cent to 12.9 per cent (source: National Statistical Office). The physical assets principally constituted bank-financed residential properties by the middle class. This, no doubt, was a good development, but came at the cost of their (a) past savings towards margin money payment for the loan and (b) part of current income as EMIs.
It needs to be investigated whether there were large/bulk withdrawals, in any form, from any accounts after the withdrawal of ₹2,000 notes from circulation in May 2023.
Possible remedies
Obviously, PSBs need to rejuvenate their deposit mobilisation efforts with focus on medium- to long-term fixed deposits (FDs). This will lend stability to their deposit portfolios. Short-term deposits of ‘below one-year maturity’ should be consolidated, if not phased out, and PSBs be permitted to mobilise ‘over 10-year’ deposits. Reliance on bulk deposits should be discouraged.
In order to make bank deposits attractive, interest earned thereon should be free of income tax, for all.
PSBs need to recruit more staff, and adequately equip their deposit desks. Deposit mobilisation campaigns targeted at potential areas and depositors with personal visits should be organised from time to time like those in 1980s/90s. The personnel in these desks should monitor large variations in deposit inflows/outflows in accounts.
During 2020-21 to 2023-24, PSBs have improved their financial position, convincingly. During 2023-24, the median ‘net interest margin’ for PSBs stood at 3.26 per cent (2020-21: 2.77 per cent) with a range of 2.45-3.92 per cent (2020-21: 2.11-3.26 per cent). The improvement can accommodate ‘up to 100 bps’ increase in deposit rates, distributed optimally over the maturity buckets, sans increasing lending rates.
Further, according to RBI, during May 2022 to June 2024, while the repo rate rose by 250 bps, the Weighted Average Domestic Term Deposit Rate (WADTDR) (fresh deposits) and WADTDR (outstanding deposits) rose by 233 basis points (bps) and 187 bps, respectively, for PSBs, implying further potential for deposit rate increases.
Deregulation of SB interest rate should be rolled back, and the RBI should fix the rate. Penalties on SB account-holders, especially for non-adherence to minimum balance rule, which seem to be aimed more at increasing non-interest income of banks than disciplining depositors, should be kept at the minimum, if not abolished. This makes sense, especially when financial literacy is low in the country.
While cross-selling credit cards, PSBs should issue ‘secured’ credit cards against FDs as collateral. Opportunities for deposit acquisition also come when customers visit branch to inquire about new products or services like demat and securities trading accounts. In the case of premature closure of FD, the depositor may be encouraged to take a loan against it, instead.
Fee income should be augmented to compensate for reduction in ‘net interest income’, if any, due to deposit rate increases.
The RBI has successfully leashed unsecured and certain personal loans. The strategy should continue, especially for loans for unproductive purposes.
PSBs have managed the shortfall in deposit growth via alternative funding sources like certificates of deposits, commercial papers and infrastructure bonds. Does it mean that PSBs are in the cusp of bank- to market-driven financial development? If so, will it be ‘core’ banking?
Das is a former senior economist, SBI. Views expressed are personal. Computations are based on bank balance sheets unless otherwise mentioned
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