Bulky Deposits and Indian Banks

Banking Never Change

The period was mid 1990s. (I don't remember the exact FY). Rs.730 cr. bulk deposit (name for high cost whole sale deposit) was canvassed by a branch of a PSB (public sector bank) in New Delhi in the last week of March from a PSU. The deposit was for five years and the interest cost was 100 bps more than the normal rate for a retail deposit for a similar period. Mr. X, the branch manager became a super hero overnight, as the entire bank could achieve its top lines (business levels) by a comfortable margin as well as that the cost impact will be felt in the future years only.

But there were voices of dissent  at the lower levels and in circles normally perceived as the 'negative bunch', within the bank. Some notable remarks were

1. A BM need to achieve the target growth for his branch only and not for the entire bank (that is left to the head office and zonal offices)

2. The bank may lose out on bottom line (operating/net profit) to sustain the top line, if matching period advances at an yield higher than the cost of acquisition is not found out.

3. Higher interest loan comes with a compromise on quality and reduction in low risk exposure portfolio.

4. If the deposit is withdrawn suddenly (the concept of callable and non callable was unknown at that time), the bank may have to borrow heavily, since the advances financed/ investments made cannot be called back. While raising retail deposits to that extent in a short time is ruled out, even raising bulk deposits to match that volume will take its own time, apart from being more costly.

The essence of the discussions were two: 

A. While bringing something big and costly in the liability side, the bank should have identified/sensed the demand existing on the asset side, where the deposit can be deployed profitably. And the yield should also factor in reserve requirements for the deposit, like CRR and SLR  which were offering nil/lower returns (at that time).

B. Contingent plan should have been in place to meet any demand for prematurely withdrawing the bulk deposit, so that reputation of the bank is not endangered and the resultant cost  of the contingency plan to be executed is manageable.

I did not know whether the concerns raised in the lower levels became an issue/ a reality in the subsequent years. But I do know that the branch manager Mr. X got his promotion to the next level shortly. Looking at future events, he was also awarded an overseas assignment in due course.

SVB episode of accepting bulk deposits from a particular sector (startups and the like), then investing in long term investments, totally forsaking the likelihood of illiquidity/loss  factors reminded me of the above incident.

In my long banking career of more than 36 years, I never found a satisfying answer to the following questions

1. Personal Career ambitions of an individual and the development of an institution are compared to a pair of rails in which the institution should run. How to ensure that the rails are parallel and are of the same length all the time.

2.  Growing the top line, ensuring  liquidity and sustaining profits – do they  become an ‘impossible trinity’ to  be achieved for small and mid-sized banks after a certain period, without going thro' reconstruction/ merger/ amalgamation?

Regards

V. Viswanathan

26th March 2023.


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