Hello everyone,

Welcome to the 125th edition of The Pattern, a weekly where we dive into the latest from the world of economy, technology and finance. Let’s get started.

Banks can’t agree on why they can’t get people to save

What do you do if you’re in a jam? You ask your friends and colleagues and maybe someone senior for their advice and you follow it with the hope that borrowed wisdom will be better than meandering in the unknown. For deposit-starved bankers however, it’s becoming a bit of a nightmare even to establish a standard theory of why depositors aren’t queuing up at their branches.

It’s been a problem for a while. Over the last couple of years, deposit growth in banks has slowed (not vanished or reversed, just slowed) while credit growth has continued to shoot past the ceiling. This causes anxiety among the regulators, the government and even the banks themselves. In July, RBI Governor Shaktikanta Das warned banks about this and said they’d need to be innovative to attract deposits.

Well, they tried. From offering higher interest rates for creative terms to offering add-on services – banks pulled all strings trying to get deposits in. And somewhat succeeded too.

But now that options are drying up, disagreements abound on whether banks can even raise deposits – irrespective of how innovative they get at marketing.

First, there’s an SBI research report that suggests the deposit crunch is a “ statistical myth ” - aruging that bank deposits have consistenly risen year-on-year and hence, there’s little cause for panic even though credit growth is outpacing deposit growth.

"The myth of a flagging deposit growth appears as just a statistical myth with credit growth outpacing deposit growth being tom-tommed as a deceleration in deposit growth" said the report.

But, there are other opinions in the market too. For instance, the returns offered by mutual funds are outclassing banks’ humble interest rates and hence, savers are flocking to the markets rather than coming to the branches with their hard-earned money, according to the Indian Banks’ Association Chairman MV Rao.

“Returns by MFs are higher because banks’ deployment of resources is regulated so tightly that you cannot get higher returns from the deployment. At every level the end use has to be ascertained and you have restricted rate of interest for many of the asset products that banks are offering,” Rao said .

Meanwhile, some disagree. According to HSBC India CEO Hitendra Dave, the theory that mutual funds are stealing banks’ deposits doesn’t add up because he posits that even those deposits will make their way back to the banking system anyway.

“I think it will be good for IBA to actually do a study as to what typically causes deposit creation because if we keep blaming systematic investment plans and MFs we will be solving the wrong problem,” Dave told the Economic Times.

Even as banks struggle to fund their way out of this cash crunch, it’s getting expensive. New data released by the RBI suggests that almost 67% of the deposits garnered by banks by June this year were at an interest rate of 7% per annum, as compared to just 45% of the total deposits in the same period,

"The share of deposits with 7% interest rate rose because banks are offering higher rates not just to retail depositors but also mobilizing bulk deposits and certificate of deposits over 7%," said Madan Sabnavis, chief economist at Bank of Baroda. "For a long time, post-Covid, most banks offered sub-7% on one-three years deposits. Also, to narrow the gap in credit-deposit growth, banks raised deposit rates to over 7%.”

What does this lead to? If banks continue to offer aggressive interest rates to keep up the deposits, things might be challenging on the bottom line. Credit growth will improve interest incomes, but expensive deposits will squeeze those margins. A tricky balancing act is about to come.

This is all from me this week. As always, leaving some reading recommendations below.

Reading list

1. SBI chief says banks lack skills to lend to new sectors

2. Banks ready list of 3,000 entities involved in fraudulent practices

3. Personal loan sees 14% growth; cards, gold major factors behind surge

4. IRDAI prohibits insurers from collecting premium before policy approval

5. Deposit problem to ease if govt parks surplus funds with commercial banks instead of RBI, says Kotak MF's Nilesh Shah

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates.

Cheers,

Mayank

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.