 "Interest rates not primary driver of deposit growth for private lenders")
Customer service, not higher interest rates, will be the key driver for deposit mobilisation for private banks, said top executives from private sector banks at the Business Standard BFSI Insight Summit 2024. They were in a conversation with Tamal Bandopadhyay, Consulting Editor, Business Standard.
Indian banks have been struggling to mobilise enough deposits to support the credit growth in the system. As a result, the credit growth in the system outpaced deposit growth for nearly 30 months after finally aligning with each other in the fortnight ended October 18.
However, the alignment in deposit growth with credit expansion can largely be attributed to a decline in credit growth from its previous highs.
According to the latest data from the Reserve Bank of India (RBI), deposits in banks grew 11.74 per cent year-on-year (Y-o-Y) during the fortnight ended October 18 to Rs 218.07 trillion.
Credit growth, during the same period, came in at 11.52 per cent Y-o-Y to Rs 172.38 trillion.
Credit growth exceeded deposit growth since the fortnight ended March 25, 2022, leading to a widening gap that reached as much as 700 basis points (bps).
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The challenge of deposit mobilisation for banks was intensified by the upward trend in equity markets, which has attracted more household savings than lenders.
After Covid, households have increasingly shifted their investment to equities, directly as well as through mutual funds (MFs), at the expense of banks.
“Our experience is, if you are able to take care of the customer, you will be able to mobilise deposits,” said Prashant Kumar, managing director (MD) & chief executive officer (CEO), YES Bank.
“From the very beginning, private sector banks were fully aware that for their existence, they had to mobilise deposits and for that they were reaching out to customers. Over a period of time, there has been a huge improvement in the efficiency of the system, both on the government and corporate side. So, money is moving from banking to other asset classes. It is getting tougher to mobilise lendable deposits,” he said.
According to V Vaidyanathan, MD & CEO, IDFC First Bank, the use case of savings accounts is different from mutual funds. We should not mix the two as both are required.
“Typically, individuals keeping 3-6 months’ money of transactional activities in their account and beyond are advised to invest in equity funds. Both are necessary for the economy and individuals. Therefore, we should not look at it as mutual funds are pulling away money from banks. We should know that if a customer is debiting a bank account and putting money in equity, the counterparty is selling some stock and that money is coming back to the banking sector. Only, the colour of money is changing from retail deposit to corporate deposit. I don’t see this as a fundamental issue as money is staying in the banking pool of deposits,” he said.
Rakesh Sharma, MD & CEO, IDBI Bank, said that as consumption is increasing, the savings rate has come down. He expressed confidence in bank deposits saying they have their own strong points: they have liquidity; they are less risky; and are remunerative.
However, they are not as remunerative as other investment avenues.
“To some extent, individuals can get more returns from mutual funds. Hence, they invest their money there. Owing to the low savings rate, deposits have come down and that is a challenge. But at the same time, the bankers will have to come out with new products. It is not a big challenge to mobilise deposits. It’s just that we have to come up with innovative methods of raising deposits.” he added.
Vaidyanathan said when the bank began operations, it offered a savings interest rate of 7 per cent. However, it soon realised that interest rates were not the primary driver of deposit growth. As a result, they reduced the rates, but this decision had no negative impact on the rate of deposit growth.
“Interest rate is not the solution. The solution is service. We have gone crazy about service and technology,” he added.
“There is always a base-level deposit and above base-level deposit. Base-level deposits are driven by service, usability and not by interest rates. The major differentiator is delivery of service,” said R. Subramaniakumar, MD & CEO, RBL Bank. He added that beyond the base-level deposits, the interest rate is a big differentiator.
Individuals who are looking to park large sums of money in deposits would look at interest rates because they can earn better interest in alternative avenues of investment, he said.
“So, to attract that customer segment, the interest rate on deposits should be closer to the interest rate of the alternative investment,” Subramaniakumar said.
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