Do bank deposits really need crutches?
3 min read 21 Jul 2014, 12:40 PM ISTCompetition from debt funds is not even a dot on banks' unparalleled resource franchises
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In the din on credit quality that has pervaded the media and analysts’ attention in the last five years—even my local grocer, who claims he has no bank account, talks about non-performing loans—I had almost forgotten that banks begin life by making a spread between lending and borrowing! Thanks to the finance minister for reminding us that.
The specific reference is to the budgetary provision that makes fixed income funds less tax-efficient than before. Banks now expect to wean depositors away from those funds—they fought hard against the tax arbitrage that benefited fixed income funds, and finally won.
In theory, providing tax benefits to one instrument and thus jeopardising the prospects of another is bad. The calls for restoration of a level playing field become strident as the affected interest group, which is generally more numerous, gets vocal. Mutual fund customers too do not get as many tax benefits as insurance holders do. Practical life is more complex—products are at very different stages of development and may selectively need a fillip from the taxman. Considering what a minnow the fixed maturity plans (debt products that putatively compete with bank deposits) are compared to bank deposits, it is ironical that banks should have been even bothered to raise their voice against them.
This phenomenon is not new—it is reminiscent of the banks vs. small savings battle of 2010. With loan demand collapsing, banks wanted to rein in deposit growth by reducing deposit rates, but claimed that they were constrained by a floor created by small savings or postal deposit rates that were controlled and artificially high. But banks finally did act, though the government followed up later with an eminently sensible decision to make small savings rates more market-linked. Actually, banks’ complaints were unfounded. They did not position deposits properly (bank deposits are very different in convenience and liquidity than small savings), and needlessly feared that a deposit rate reduction will lead to impairing their resource franchise. Nothing of that sort even remotely happened.
Perhaps the demands from banks’ deposit mobilisers arose from the general paucity of deposit growth relative to the loan growth for the better part of the last three years. But this was a time when financial savings as such lost out to physical savings. The other development that has gone unnoticed is that the situation has reversed in the last six months—deposit growth now outstrips lending growth—making one wonder whether the angst against small savings will be vented again (since rates are not completely freed and get changed only annually). Banks should learn to manage their deposit franchise both on the way up and down for interest rates.
Whoever offers a decent risk-adjusted real rate of return wins. Banks’ greatest competitors for resources are inflation, gold and real estate, not debt funds.
Banks should relinquish this fatuous call for a level playing field and instead get vigorously back to innovation on deposits that has come to a standstill. Unlike other collective investment schemes, deposits for banks are just the start of a relationship that can flower into loans, fees and investment counselling. If banks internalize this principle, there will be no reason for them to fear competition from products that are far smaller (actually banks can learn from themselves—how many offer more than 4% on savings accounts despite being deregulated?). If “innovation" on deposits sounds pointlessly grandiose, let us not forget that Axis Bank Ltd (then known as UTI Bank) sprang from nowhere in terms of retail recognition to the third largest private bank by offering 12 “different" savings accounts. Well, can anything be more pleasantly bizarre than the “marketing" of a savings account, of all things?
The government too does not need to offer a helping hand for bank deposits. During this period of weak deposit growth, private sector banks, even large ones, have outperformed the industry growth rate for deposits, without excessive dependence on wholesale deposits that provide the bulk but generally at a higher rate. In the mind of an average saver, a bank has the image of safety and reliability, which is absolutely unparalleled, not to mention that 70% of banks have an implicit sovereign guarantee. They do not need crutches. And if the government listens more to this level playing field demand, tomorrow, there will be a clarion call from banks to stop helping the growth of the bond market, which by then, would have been accused of taking away share from bank lending.
The author has been a senior research analyst on financial services as well as other sectors at various investment banks, and is currently an independent consultant focusing on banks and financial services.
