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🏦Bank Deposit Battle: A road less travelled

by tavaga

Why are banks left high and dry?

One sector which benefited immensely from the demonetization was banking. Piles of money stashed in homes found their way into banks! Banks became cash rich and were floating with easy money, literally overnight! Deposits have since then grown at double digits while credit growth has been at a mere 5-7 percent.

So, all these years, growing deposits was not a problem for banks at all. Even when the pandemic hit, the real challenge was to find credit growth.

The tables have turned completely now. The period of easy liquidity is almost coming to an end. We are soon going to see a crazy battle between banks to get a share of consumers’ savings. In short, the battle for deposits is soon going to begin.

Why are Indians not depositing money in banks?

After falling short of deposits all these years, credit growth is now outpacing deposit growth. In fact, in the last three months, growth in bank deposits has been significantly lower than credit growth. But, why are Indians not depositing money in banks?

INFLATION is the answer. Households are the biggest contributor to bank deposits. However, interest rate hikes on loans in the past couple of months have dented Indian households’ savings. Hence low deposits.

Another reason why deposits have been low is due to record low returns on term and fixed deposits compared to inflation which has made real returns negative. This means you are effectively losing money by investing in Fixed Deposits! This has also made households look for alternative sources to park their extra cash.

Where are they investing?

In case you do not know, in a high-interest rate scenario like current times, debt mutual funds and corporate bonds yield become super attractive and currently they are giving double-digit returns! Equity investing is another newfound hobby that a huge chunk of retail investors picked up in their free time during pandemic. From a mere 4 crore Demat accounts in March 2020, we now have 10.5 crore accounts in August. Masses turning into investors!

Credit growth on the other hand has remained buoyant after pandemic concerns started waning off. Pent-up demand, capex revival, are some of the reasons behind it.

This widening gap between credit and deposit growth is putting more and more pressure on banks’ resources. RBI’s aggressive plans of rate hikes and liquidity tightening to control inflation in the country have only widened this gap.

So, in nutshell, the deposit market is heating up and several new and old banks are devising strategies to suck as much deposits into their kitty as they can.  

Battle for deposits coming soon!

Several lenders have announced limited period offers on deposits ahead of the festive season. SBI is also looking to hire an external consultant to revamp its current and savings accounts, as it prepares itself for the scramble. Banks are also exploring partnerships with established fintech players in the industry to quickly ramp up their digital offerings.

Wait and watch

The pressure to aggressively chase deposits is quite evident. Almost every bank has spelled out the need to increase deposit rates in their latest earnings announcement. They have however remained cautious not to give exact details of their strategy. Several of them want to play the wait-and-watch game and do not want to be the price leader even while remaining in the competition.

Bottom Line

Bankers have a unique business model and they will now have to compete on both sides of the balance sheet! They will have to brace themselves for something that they have never done before.

That aside, consumers will at least have something to cheer for and may soon start looking at FDs again!

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