Bankers chanting - D For Deposits

Dear Readers,

Where are the bank deposits going? Are the youngsters spending it on their get-togethers at fancy restaurants, buying gadgets and shopping to flaunt their lifestyle? Or are they using it for mutual funds, trading or splurging on online platforms like rummy games? Are they not finding fixed deposits ‘cool’ anymore? Here is my view.

Borrowing money at lower rates from depositors and lending it at a higher rate is what lenders' business is all about. In his memoirs, Just a Mercenary, former Governor of RBI D. Subbarao cites a memory of his mother where she was miffed about the low rate of interest on fixed deposits. At the same time, her friend would complain that interest rates on home loans are way too high. Subbarao says many don't see the connection between the two, as banks cannot give you a higher interest rate on deposits without charging a higher rate of interest on loans.

But in today’s world the customers, unlike Subbarao’s mother, are looking at various investment instruments other than bank deposits to garner more returns on their money. This has become a situational problem for banks. Meanwhile, bankers are still rigid and traditional in their attitude. Remember, bankers always thought the customer would not go anywhere but come bank to deposit his money. However, there are many issues that have come together and banks will have to be far more serious about deposits. Otherwise, they might lose a significant chunk which they have been using since their inception. The new-age generation is not going to think twice even for a few basis-point difference to move their accounts elsewhere, unlike senior citizens.

Owing to this, banks have increased interest rates on fixed deposits.

Bankers beware of the negative marketing around FDs

Generally, a large chunk of bank funding comes from deposits. But it has been dipping. There are various reasons. First, the mutual funds came for them. Then apps that promise ‘easy’ investments into stock markets came for them. Corporate deposits came for them. Now, IPO flipping with its mouth-watering short-term returns is making Indian savers break their FDs.

Recently, to my dismay, I saw huge hoardings of a home FD – an investment in home comparing itself to an FD. Legality aside, the hoardings taught me something — that everyone is marketing their ‘financial product’ against the age-old fixed deposits.

No wonder, the FD money is going everywhere and all over – far, far away from the banks. How much investment in SBI stock would yield as opposed to SBI FD, scream some news article headlines. Others have a table comparing FD returns with the stock market, MF and other investment avenues.

But please remember FDs are not a product that provides people with outsized returns. It’s a safe product like grandma’s gold in the locker that offers comfort and should be a part of liquid investments that one should hold. How much savings one should hold in FDs is what an investment advisor must tell, but they’re not as obsolete as the new-gen marketing is making it out to be.

Why are fixed deposits unattractive?

The reasons are many. The interest rate is not very lucrative. Also, interest earned on fixed deposits is eligible for 30% tax if the deposit size is more than Rs 50,000. Customers are also tired of banks' hidden strategies like automating FD. Once customers enroll for FD, banks generally do not let the customer encash them easily. Earlier, banks used to transfer the funds as soon as the FD matured. Now they put it on auto-renewal. For which the customer has to go to the bank, sign an application and request the bank to release the amount. Sometimes banks charge a penalty as the FD is automatically renewed and they treat it as breaking the contract.

Other investment schemes

Mutual funds, which are easily giving a minimum of 3-5 per cent better returns than FDs, are the talk of the town. The mobile apps with glossy UI and UX built by hundreds of FinTechs are extremely convenient for new-age customers to invest in the capital market and various asset classes that fetch better returns. Investing and trading has become a phenomenon with millennials and GenZ, sucking funds from FDs. Not to forget that the consumption story of India is intact, and with e-commerce customers are buying rigorously. The spending of the new generation is reasonably high and they don't believe much in saving.

What is going wrong with deposits?

For banks to keep interest rates low is beneficial but this theory is not working any more. Currently, banks do not have major issues with liquidity hence they will support economic growth. But if the deposits continue to go down then it will translate into lowering credit growth. This also means the interest rates will not come down. However, banks will have to be rational on fixed deposits because the cost of funding is also high. The challenge will be more for mid-sized banks than large banks.

Bankers’ view

It's not the issue with the deposits but the category of deposits. Because the money is ultimately in the banking system. The major challenge is the traditional segments of deposits where banks were always confident are getting revamped. For example, the longer tenure of deposits from 24 months onwards is a very competitive pace for banks. Small Finance Banks are offering almost 9% interest rates whereas large banks are still around 8%. Remember earlier the spread of the rates was around 6,5-7.5% largely. Another point is banks are still getting deposits from corporates, MF, corporate treasuries etc, but they come with a shorter tenure and hence banks don't look at them like FDs. The struggle for banks will be to improve the CASA ratio and also to maintain the CD ratio at a reasonable level. That will continue. Broadly, the job of a banker is going to be far more competitive and tougher day by day as convincing customers to opt for longer-tenure deposits is not going to be easy.

As usual, I am adding here the top 5 stories of the week, trust you will find them meaningful.

1. FinTechs will face their next test in market integrity and financial stability, says Sopnendu Mohanty of MAS
2. Payment aggregators to develop centralised database to combat rising fraud
3. RBI DG highlights ‘huge addressable market’ in MSME lending; What data says?
4. What are the new Public Provident Fund rules?
5. Will GST Council give relief on life insurance premiums?

Happy Reading.

Amol Dethe,

Editor,

ETBFSI.