Why boosting bank deposit growth is an arduous challenge

Shaktikanta Das, Governor, Reserve Bank of India (RBI) Image: Punit Paranjpe / AFP
 
Finance Minister Nirmala Sitharaman and Reserve Bank of India (RBI) Governor Shaktikanta Das have laid out a tough assignment for banks, to bulk up bank deposits. The financial health of banks appears to be in order, with aggressive lending both in the form of secured and unsecured, as corporates and individuals seek more capital to meet their business or personal needs. For most banks, credit growth, in terms of advances, has continued to outpace the growth in deposits in recent quarters, which has become a matter of concern for the RBI governor Shaktikanta Das.

Sitharaman, in a meeting with bankers last week, called them on to focus on smaller deposits that may come in “trickles” but are the “bread and butter” of the banking system, according to media reports.

In his latest speech, Das expressed the need for banks to “focus more on mobilisation of household financial savings through innovative products and service offerings and by leveraging fully on their vast branch network.” As equities, real estate, gold and alternatives have offered better returns to individuals; banks have been facing challenges to lend, as loan growth continues to trail bank deposits (see chart).

Credit growth of all commercial banks expanded 13.7 percent as of July 26, from a year earlier, outpacing deposits which rose 10.6 percent in the same period.

The RBI has in recent months has explained their zero-tolerance policy towards compliance and regulatory lapses to heads of banks. The regulator wants banks to have clarity about income recognition, bad loans and making provision for the same, particularly since banks have been lending aggressively in recent years.

“The divergence between bank deposits and bank credit growth may create liquidity management issue which a bank has to deal with,” Das recently told reporters at a meeting after announcing the policy decision to keep interest rates unchanged at 6.5 percent. The central bank last hiked rates in February 2023.

How Real are the Governor’s Fears?

Experts say, theoretically, banks could face liquidity concerns if the credit-to-deposit divergence widens. But this does not appear to be happening within most of India’s banks. “The problem would be if a bank is raising short-term deposits to back an asset with a longer tenure maturity, and the deposit is not renewed. Then the bank needs funds to pay those deposits,” says a banking analyst with a private research house, declining to be named. But India’s large and mid-sized banks do not face this concern.

So while an asset-liability mismatch may not happen, the one problem which banks face will be an impact on margins and profitability. They will have to borrow at a higher cost which might impact profitability in coming quarters.

“Household deposits form 61 percent of total deposits and growth picked up to 12 percent after two soft years. This may reflect reallocation of savings to capital markets and consumption growth. Within household deposits, share of savings deposits fell to a seven-year low of 41 percent with money moving to term deposits, hence may be peaking,” Jefferies India analysts Prakhar Sharma and Vinayak Agarwal said in a July 1 note to clients. This reflects the fact that household savings are moving away from bank deposits towards assets which have generated better returns.

“Within deposits, term deposits grew fastest at 19 percent, taking share from savings (up just six percent). Savings deposit growth for PSU and private sector banks has converged that is a potential risk for private sector banks, from ability to mobilise low cost deposits,” the Jefferies analysts said.

For investors who rode the Indian equities journey late, passive and exchange traded funds (ETFs) have been amongst the most popular in the last few years. Those with a higher risk-taking ability have ventured into F&O (Future and Options) trade, where the regulator Securities and Exchange Board of India (Sebi) has already clamped down, due to massive intraday losses which traders have suffered in the past two years.

Data compiled by Forbes India shows that while the top four banks in India (SBI, HDFC Bank, ICICI Bank and Axis Bank) by asset size, have seen a rise in deposits and advances (see graphs), the pace of growth has been higher for advances over the past one year.

For SBI, credit growth has risen by around 15.9 percent while total deposits for the standalone bank have risen by around 8 percent in the one year from June-ended 2023 quarter to June-ended 2024 quarter. For Axis Bank, credit growth (14 percent) outpaced deposit growth (12 percent) in the same period. ICICI Bank has also seen loans edging out deposits in the same period.

Unity Small Finance Bank is offering possibly the highest deposit rate (of 9 percent) for a fixed deposit of Rs 3 crore in the select timeframe of 1,001 days.

New, Innovative Products

Investors tap bank deposits when they find good interest rates or a safety net for their savings. “To garner additional deposits banks will need to offer higher interest rates to make deposits attractive, with a longer lock in and pass on interest rate on the disbursements,” says Bhavik Hathi, managing director of Alvarez & Marsal’s global transaction advisory group.

“The second option is what banks have been doing for some time which is issuing loans against fixed deposits. They may consider offer a higher limit, in some cases even higher than the underlying deposit in select cases to meet requirements for credit,” Hathi tells Forbes India.

Nitin Aggarwal, head-BFSI (Institutional equities) at Motilal Oswal Financial Services says the play will have to be on deposit rates and the mobilisation efforts of each bank. PSU banks have not been mobilising deposits at a faster pace because they have ample liquidity. “Banks have to put in more effort by offering attractive deposit rates,” he says. But Aggarwal does not see a battle to hike deposit rates from here. “The pressure to raise deposits will continue for at least two quarters,” he tells Forbes India.

Also read: RBI: The tough regulator

The credit-deposit ratio for India’s banking system was 78.1 percent for FY24, and analysts say it should be ideally down by another one percent to around 77 percent. In 2023, Standard & Poor’s (S&P) had said the credit-deposit ratio of Indian banks may come under pressure due to continued lag of deposit growth compared to the pace of credit expansion.

Unity Small Finance Bank is offering possibly the highest deposit rate (of 9 percent) for a fixed deposit of < Rs 3 crore in the select timeframe of 1,001 days. This is the youngest bank in India, founded from an amalgamation of PMC Bank with the founding partners Centrum Financial Services and BharatPe, in 2021-22. Its managing director and CEO Inderjit Camotra admits Unity SFB is offering high deposit rates to “attract a good cohort of senior citizens, working women and small business houses” at the first go, to bank with them.

Camotra says the bank is “happy to share the interest spread (of high single digits) with the depositors. “ Being a retail bank, it lends to micro, small and medium enterprises (MSMEs), SMEs and micro-finance groups, where the interest returns are anywhere between 12 to 21 percent. “We manage our book well and keep costs down,” he tells Forbes India.

Unity SFB, which services 1.7 million customers, has a net NPA of 0.6 percent, on total advances of Rs 8,500 crore and deposits of Rs 8,100 crore as of July 2024. Deposits have grown 17.7 percent, and advances marginally slower, for the bank in the July-September 2024 quarter.

One of the savings deposits products, popular with working women, is the pearl account where wellness and healthy-related benefits, flexibility of lower average monthly balance, a dedicated relationship manager,  doorstep banking and several discounts and offers makes it a slightly differentiated product.

In 2024, Bajaj Finance launched the innovative digital FD product, with rates up to 8.4 percent per annum for general citizens and 8.65 percent per annum for senior citizens. The digital FD offers 8.4 percent interest on a deposit from Rs15,000 up to Rs5 crore, parked with Bajaj Finance for a 42-month tenure. The NBFC offers systematic deposit plans, where investments can be made at one-time or a monthly basis. Bajaj Finance says it has over five lakh customers in its digital FD scheme, with Rs50,000 crore booked.

Oswal’s Aggarwal says small finance banks have no option but to offer attractive deposit rates to draw more customers. “They have high yielding segments, like MFIs,” he says.

Deposit Rates Could Weaken

The RBI and the monetary policy committee has largely indicated that the battle to fight still high food inflation remains its priority. In that scenario, though the central bank may not cut interest rates in a rush, the countdown has begun towards this move. Signals from the US Federal Reserve suggest that it may announce a rate cut soon, after nearly four-and-a-half years.

Once interest rates start to decline—possibly by the year end in India—banks are unlikely to keep increasing deposit rates. At best, banks which could have tight liquidity concerns, it could be between 5 to 15 basis points, analysts say.

Fixed deposits with a long-term maturity could face a smaller cut in rates while those with a short- to medium term maturity could see a sharper cut in rates.

India’s largest private sector bank, HDFC Bank, has the highest credit-deposit ratio amongst banks, of 104 percent. The merger with HDFC had led to the higher ratio, due to lower deposits. This could mean a marginal slowing in credit growth for a short period.

The challenge for both public and private sector banks is to find stickiness from customers towards fixed deposits will be a real one. There are going to be no quick-fix solutions. Banks, particularly the new-age banks, will have a little more flexibility to keep deposit rates high for some more quarters, before an inevitable tapering off could happen.