Banks low-cost deposits share drop to a 10-year low

In the recent times group of pubic sector banks has witnessed drop in their low-cost deposits, the drop is a 10-year low While individuals are preferring bulk deposits and more are depositing more money in fixed deposits, which offered higher interests a year ago.

Also, the opening of customer-savvy private sector banks is responsible for bringing down investments in low-cost deposits (savings and current account balances) at public sector banks.

This year public sector banks, savings and current account balances accounted to 31 per cent of their total deposits, which was 34 per cent in 1999 and was at peak of 38 per cent in 2066, as per the study conducted by Indian unit of London-based investment banking group, Noble.

But among the public sector banks there have been some of the exceptional banks like State Bank of India (SBI) and Bank of Baroda (BoB). SBI accounted increase in its savings and current account balances in its total deposit by 41 per cent at the end of September from 38 per cent in 1999. Although, in 2006 bank savings and current account balances was 48 per cent. While BoB, has witnessed increase of 36 per cent from 32 per cent.

According to an anonymous chairman of a large public sector bank, public sector banks took time in taking on competition from private sector banks such as ICICI Bank and HDFC Bank.

Private sector banks have got hold of salary accounts of companies due to marketing skills that they used in dealing with companies, especially with those having large number of employees, he said.

In 2007 there was rise in expensive term deposits and wholesale deposits of public sector banks’ deposit portfolio as liquidity in banks have got scarce amongst an unprecedented high credit growth, due to home and other retail loans.

In 2007, banks mostly laid stress on grabbing every bulk deposit available, in a bid some of the banks offered interest rates as high as 15 per cent in some instances. At that time the fight for bulk deposits between the banks intensified so much that the then chief executive of Indian Banks’ Association (IBA) had to meet the top officials at SBI on behalf of ICICI Bank.

The IBA official gave the message that the banks should stop increasing bidding for bulk deposits, as there was lack of faith on each other no solution could be found for this.

The ICICI bank low-cost deposits share in its total deposits stood at 13 per cent 10 years ago which has increased to 37 per cent.

While the HDFC Bank low-cost deposits showed high percentage. In September, bank low-cost deposits accounted at 50 per cent of total deposits, which is up from 46 per cent in 1999, although it has come down from 61 per cent in 2005.

Since 2004 HDFC Bank’s low-cost deposits share was above 50 per cent. However none of the banks have been able to achieve 50 per cent and more share of low-cost deposits in total deposits.

Banks continue to invest in mutual funds, ignore RBI directions

The Reserve Bank of India (RBI) has told banks not to invest in mutual funds, mainly because the credit off take has still not improved, but they continue to give funds to asset management companies.

As per the latest RBI report, by fortnight ended November 20 the investments done by banks in MF schemes has increased from Rs 4,173 crore to Rs 1,64,656 crore. Banks invest very high amounts in the beginning of quarter and then withdraw funds at quarter end so that they do not require providing additional capital. And again they invest back the funds after the quarter ends.

Last month RB governor D Subbarao, in his monetary policy review had pointed out that bank investment in mutual funds have increased and their boards should put some limits on such investment.

Banks have invested funds with liquid mutual funds basically not only from their own surplus funds as lending was low, but have borrowed money from the collateralized borrowing and lending obligation (CBLO) at cheaper rates and later invested funds in mutual and also in RBI’s reverse repo scheme and earned a higher return. To stop such arbitraging, the central bank imposed a CRR of 5% for CBLO borrowings, which means the banks will have to keep aside more funds as cash so that they can invest with the central bank, in order to reducing their invested surplus.

According to bankers, banks are investing in MF due to poor credit off take. M Narendra, executive director, Bank of India, told after the RBI guidelines, banks have started re-looking at their strategies thereafter have revised their internal targets for mutual funds investments and sub-targets for various schemes. Thus, there can be measured increase in investments.

On the other hand some of the banks having ultra-floats (huge temporary surpluses) might have invested in liquid funds, he said. Anil Girotra, executive director, Andhra Bank said, “Many projects are still waiting to be executed because of which disbursals are delayed, though there may be sanctions, because of which banks could have surplus funds. Only those banks who have had temporary surpluses have deployed funds in liquid MF schemes rather than deploying in the overnight call money market.”