Banking: Reinforcing resource base

Dr. Boidurjo Rick Mukhopadhyay

International Award-Winning Development and Management Economist. He can be reached at boidurjo@gmail.com

Prof Bibhas K Mukhopadhyay

Professor of Management, and author of the book 'India's Economy: Under a Tinsel still Tough'. He can be reached at m.bibhas@gmail.com

At the outset let us look at the latest business results so far as the banks in India are concerned. Bank credit and deposits grew 6.18 per cent and 11 per cent to Rs 102.45 lakh crore and Rs 138.67 lakh crore, respectively, in the fortnight ended on June 19, according to the RBI. In the fortnight ended on June 21, 2019, bank credit had stood at Rs 96.48 lakh crore and deposits at Rs 124.92 lakh crore. In the previous fortnight that ended on June 5 this year, advances had grown 6.24 per cent and deposits by 11.28 per cent.

An increasing pressure exists for expanding credit/investment growth so that the economy can bounce back shortly. But is it possible with timid deposits growth, huge NPA, near absence of large banks [India has only one bank in global top 100 banks, and countries with one-sixth of India's size like Switzerland and Singapore have far more large banks], among others?

The starting point is always strong deposits base backed ably by better scale and quality.

The ongoing situation with the pandemic has also been affecting banks, especially as they have been facing a difficult time to attract deposits. Not only intense competition but in the recent past the attractions to the mutual funds market also tilted the field and made it difficult for the banks to retain their depositors.

This has been the major challenge confronting the bank. Weak core deposits growth stands in the way of fund deployment options. Increased reliance on wholesale funding sources is logically being replaced by CASA [Current Account Savings Account] considered from the spread point of view. Undoubtedly, the task is not an easy one especially inasmuch as there is an ever-expanding intense competition from all types of banks [nationalized, private and foreign banks].

It is a fact that substantial variations exist in the growth rate of bank deposits among regions. While the SB section is maintaining stable growth over the years, the TD section has also been registering a positive trend. Comparatively, the CD section shows wider volatility.

Differences in the growth rate of deposits in various areas are influenced by numerous economic forces that include income, saving, interbank competition as well as between the banks and financial institutions.

Better deposits' growth essential to cater to higher credit demand.

While the total volume of bank deposits in the economy is determined largely by the macro variables vis-à-vis the needs and objectives of the economy, the market forces determine the distribution of these deposits among individual banks and areas.

It is important to remind ourselves that household demand for financial assets emerge from four sections mainly – marketable bonds, time and savings deposits at banks, life insurance reserves as well as savings accounts at other financial institutions. Demand deposits are generally held as a convenient means for settling day-to-day transactions and as a means of storing wealth.

Growth of both income and wealth of the community come into play here. Time and savings deposits, over and above their relationship to income and wealth, are also associated with the convenience and competitive strength of the bank relative to the savings mediums. That is why such deposits growth in a region is associated with the number of branches, the rate of interest paid relative to other financial intermediaries and alternative opportunities available for parking savings.

Differential deposit growth rates among regions, in turn, may be attributed to inter-regional differences in bank's market structure and economic forces and the fact that bank deposits are one of many forms in which the liquid wealth may be held. Though the growth of time and savings deposits is influenced by rates of interest paid, yet interest rates are not the only factor affecting time deposits growth since growth in incomes and alternative opportunities for investing savings have also been important determinants of deposits growth.

As the things stand now, the SB is playing a commendable role and the CD wing is also gaining a good response. With the introduction of a new system of paying interest in the SB a/c, the scope has widened inasmuch as the depositors could find it more profitable to invest their fund in such an alternative. This new system of interest payment also acts as an incentive to customers' SB transactions and it is reasonably expected that the SB section would receive greater preference from the average customers as compared against previous responses noticed. Hence, the emphasis on SB could help sustain the deposits growth process.

Side by side, efforts directed towards turning the dormant accounts into operational [through direct contact with the account holders via verbal and non-verbal communications] at a quicker systematic pace could certainly help grab further business advantages by way of retaining the customers thus already existing in this bracket, while simultaneously netting in more deposits from the hitherto dormant accounts.

A better picture is not far away

The renewed emphasis on the MSME Sector could invite more entrepreneurs in the field along with the existing players – more transactions in the CD wing are reasonably expected. So, the CASA section is expected to ensure sustainability.

More conscious and careful customer attention could help sustain the growth process via extending required services to the rapidly growing urban/suburban settlements.

Providing new/improved services vis-à-vis meeting customers' needs at lower costs that are being followed could help protect deposits growth moving south. Innovations could exert a considerable competitive impact on other banks.

Since quality has become a commodity quicker customer-friendly-environment backed services hold the key on this score. Of course, there remains a high possibility of netting more deposits from the public as the economy is moving north steadily especially when the last Central budget has emphasized more on the investment in infrastructure and rural development, which, in turn, could result in more business activities in all of the regions – metropolitan, big cities, small cities and the semi-urban / rural regions. Much depends of course on how the inflationary forces are tackled during this fiscal.

Well-managed, aggressive branches are sure to attract an increasing proportion of the banking business in a particular region while at the same time boosting efforts towards retaining existing customers. It is crucial to provide bank customers with a pleasant environment and naturally, the look must be for improving ways related to service quality. It is for enhancing customers' experience – the value proposition that is given is a relationship – the relationship management that gives the personal attention they would not typically get from the larger competitors.

This is reality, which necessitates technically competing with a human touch in a way where the actions and responses could become more customers centric and better result yielding.

The best way to grow deposits is to keep at it – tenacity could definitely be the banks best strategy. With the economy registering a bit of upward trend the year 2020-21 is not going to be a bad year hopefully so far as this vital banking business indicator is concerned.