What’s causing deposits to trail advances? Bankers differ over the reason

Mumbai: Deposit growth has been lagging advances lately, sparking a vigorous debate among bankers, including the RBI, over the reasons for this divergence and how to boost savings.

On Thursday, the country's top bankers differed sharply over what was causing the deposit-credit mismatch. Some of them blamed mutual funds, which fetched superior returns, and sought government and regulatory support to allow higher return on bank deposits to be able to compete with fund houses. Others called this diagnosis simplistic.

Lower bank deposits

Speaking at the banking conference FIBAC (Financial Institution Benchmarking and Calibration), MV Rao, chairman of Indian Banks' Association (IBA) and CEO of Central Bank of India, pointed out that returns from bank deposits are lower as end-use of the savings is tightly regulated, curbing the lenders' ability to deploy them more profitably.

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"The returns which are given by the mutual funds are higher because our deployment of our resources is regulated so tightly by the regulator and you cannot get higher returns from the deployment. If you see the mutual funds, the end-use verifications and their deployment has no restriction," said Rao." But going forward, we have to evolve ourselves and ensure that higher returns be given to the depositors. There, the involvement and also active participation of the government and regulators are required," he added.

Notwithstanding the current mismatch, bankers present at the conference jointly organized by industry body Ficci and IBA (FIBAC) said that the lag in deposit growth is a transient issue and not a structural one.

Bank of Baroda CEO Debadatta Chand said that banks need to innovate on deposits.

"f you look at the deposit side, deposit is not going to be a generic product, it has to be a bundled product now. So, if I expect that a customer would open a new savings account at this point of time, possibly I need to bundle it to offer many other products along with the savings account so as to mobilize more deposits," Chand said.

He said that deposit mobilization, which is a constraint at this point of time, would improve. "I believe the current deposit-advance growth is a transient one, not a structural one," Chand added.

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Is it due to mutual funds?

HSBC CEO Hitendra Dave said that putting the blame on mutual funds for the current slowdown in deposits will not help. He attributed the sluggish deposit growth to the huge cash balances maintained by the government owing to the election season.

"I think it's an oversimplified argument that because, let's say, people are putting money into mutual funds, that's why there is less money for banks to tap. You know, because even the mutual fund buys something, that is sold by somebody, so that liquidity comes back into the system," Dave argued. "So, I think it would be a good idea to actually do a study as to what typically causes deposit creation. And I think unless, because if we keep blaming SIPs or mutual funds, we might be solving the wrong problem, in my sense," he said.

Bank credit riging

Latest data from the Reserve Bank of India (RBI) showed that while deposits grew at 11.7% in the quarter ended June, bank credit rose at 15%. According to a Business Standard report in August, banks have urged the finance ministry that government cash balances be held by them, rather than the Reserve Bank of India (RBI) to help improve liquidity. Under a new cash management framework SNA-SPARSH introduced in 2021, government cash balances were directed to the RBI rather than to commercial banks.

According to the state of the economy article in June bulletin, RBI officials said that banks will have to soon align their credit and deposit growth and normalise credit-deposit ratios. For the last one year, credit growth has outpaced deposit growth. Banks have been raising funds through short-term certificates of deposit and high-value savings accounts and fixed deposits.

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“Going forward, the low share of low-cost current and savings deposits in total deposits may curb domestic fund raising efforts of banks through high cost funding options, due to a likely squeeze on banks’ net margins. This may also force banks to align loan growth more closely with deposit growth and normalise incremental credit-deposit ratios,” said the RBI in its bulletin.