How to increase the pace of growth in bank deposits

 Improving deposit growth in banks: A few suggestions

While scheduled commercial banks (SCBs) have grown their loan books impressively during the post COVID period (since April 2021), their growth in deposits did not match the growth under loans during the same period.  In fact, only in 2023-24, the deposit growth of SCBs crossed two digits (lower single digits in the previous two years) as compared to the aggressive growth of 15-20% in the loan books in the last three years. As (i) 22.5% of any deposit sourced needs deployment in cash with RBI and eligible SLR securities and (ii) loan growth outpaced deposit growth by a considerable margin, apart from CD ratio reaching almost beyond manageable limits, a situation has come where the banks have to either borrow in the market (including medium term notes) or rely on the costly short term certificates of deposits, popularly known as bulk deposits.

In this regard, the GDP growth is healthy indicating that the demand for loans from the organized sector is likely to continue. Thanks to the guarantee available for the loans given to MSMEs and small business loans from the sovereign guarantee schemes in force, most of the banks are now showing good growth under this segment also. In addition, the banks have created the demand for loans in the consumption side through their aggressive offers of retail unsecured loans , issue of credit cards, micro financing and sanction of gold loans both under personal and agriculture segments. So, unless the stress build-up in a big way in the above concentrated segments, the loan growth, even if moderated, is likely to be fifteen percent plus levels across the banks.

Though the banks have increased their fixed deposit rates, the accretion in aggregate deposits is not up to the level of growth witnessed in the Mutual Funds (MFs) sector, which is brought out clearly in the following table: 

                                                                                                                (Rs. in lacs crores)

Details

August 2014

 

(1)

August 2019

 

(2)

August 2024

 

(3)

Growth of (3) over (1) in the last 10 years (%)

Growth of (3) over (2) in the last 5 years (%)

Aggregate Deposits of SCBs

80.0

127.0

213.0

166

68

Of which

Demand deposits

Time Deposits

 

7

73

 

13

114

 

25

188

 

257

158

 

92

65

AUM@ of MFs

10.13

25.48

66.7

558

162

AUM of SIPs* in MFs

NA

5.76

13.39

NA

 

132

No. of accounts under SIP* (in cr)

100.0

270.0

961.36

861

256

*Systematic Investment Plan= SIP @Asset Under Management = AUM

I have a few suggestions for the SCBs.

1.     Popularise RDs among Savings Customers: The number of SIPs had shown a growth of 861% in the last ten years and a growth of 256% in the last five years. A SIP, which can be opened for as low as Rs.500 a month, is nothing but a resemblance of a recurring deposit (RD), which is in vogue in the books of the banks, ever since the term ‘banking’ came into being. Any banker will admit that no target has ever been fixed for canvassing RD accounts. The total number of accounts under RD will be a miniscule of the total number of deposit accounts that any bank can have as on date. The banks have not only under performed in opening RDs, but were guilty of encouraging their customers to open SIP of MFs, in order to achieve their investment targets for MFs under cross selling. I suggest that 'the golden egg' available in the banking basket, viz RD be marketed effectively. A RD can be opened for a minimum period of six months and the interest rates of a RD for 6 months or 1 year compares favourably with the return on liquid mutual funds (app. 7.1%). Some banks offer RD, keeping the monthly instalment also flexible. The additional attraction for the bank customer is the perceived safety of his funds by keeping it in the banks, which are covered under deposit insurance.

2.     Focus on expanding CASA: The AUM under SIP has grown from Rs.5.76 lac cr. in August 2019 to Rs.13.39 lac cr. in August 2024, working out to an annualized growth of 26.4%. SIP-AUM accounts for more than 22% of the total AUM of MFs, (which stood at Rs.61 lac cr. as on August 2024). The AUM under SIP is nothing but a shift of money constantly from the banks to the MFs. SCBs with particular reference to public sector banks (PSBs) and regional rural banks (RRBs) opened 53 cr. accounts under PMJDY (Pradhan Mantri Jan Dhan Yojana) in the last 8 years, since 2016. The financial inclusion achieved in bringing more than one third of the Indian population under banking services has no parallel globally. The deposit outstanding under the PMJDY accounts stand at Rs.2.31 lac cr. on a recent date. (The average balance per account is Rs. 4350 plus, again impressive considering the population targeted and the objective being make available banking services to every Indian). I always felt, had the bankers supplemented their efforts in opening more number of non-basic savings accounts in the urban, semi urban and rural areas during the same period, their CASA share might not have seen a decline of more than 300-400 bps. MFs are the beneficiaries at the cost of SCBs.

3.    Compensate Savers: The savings account customer maintaining a balance of less than Rs.1 lac may be compensated at least by 50 bps more than the interest that is being paid now.

4. Canvass LMFs for less than 91 day period deposits: The outstanding under liquid mutual funds (LMF), on a rough estimate (based on the balances disclosed by leading MFs), is in excess of Rs.5 lac cr. They invest in treasury bills, commercial papers, certificates of deposits, government securities and other money market instruments with the twin objective of capital protection and liquidity to the investors. The average rate of return on date is 7.1% plus, as per reports in the public domain. Some of the SCBs are offering higher rate of interest on their savings account above a particular slab, say beyond Rs.3 lacs. The fixed deposit rates of SCBs range from 6.25% to 6.75% in the short term buckets and is comparable to the yield available on 91 day treasury bills. It may not be a bad idea for the SCBs, particularly the medium sized and SFBs (small finance banks) to approach the LMFs to park a portion of their surplus funds with them so that their deposit portion can be improved significantly. Of course, they may have to offer concessions like no penalty for premature closure, crediting the proceeds on the same day of request, differential rate of interest for deposits beyond Rs.3 cr. etc. 

Please remember, there is no easy way to success. It is earned through hardwork and perseverance as  amply demonstrated by SIP, which attained its position today after years of struggle.

Will be happy to share my thoughts further, based on feedback received. 

Regards.

V. Viswanathan 

24th September 2024.

Note: The 'spark' for writing this article came after my discussion with Shri Hari Shankar, who retired as the MD of a PSB, after serving as ED of another PSB  and serving State Bank Group prior to that for a period close to 30 years. 


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