Smaller state-owned banks are too dependent on bulk deposits to be able to offer retail customers cheaper loans
Which sector in India shows up with most competitors? Also, which sector in India offers an almost monopoly-like situation for customers? The answer in both cases is the banking sector. This oxymoronic situation seems likely to change as the sheer scale of complying with Basel III norms becomes apparent, particularly for the public sector set.
At one end there are entities like SBI, evolving as a highly dynamic entity. At the other end are small banks that have had to be told by the finance ministry to get on with it. The ministry has finally figured out that asking these banks to do stuff like moving interest rates (usually downward), providing more access to retail borrowers and more attractive options to creditors, will never work without deploying heavy artillery: asking these banks to cut their bulk deposits down to 15% of their total deposits by March 2013. This is quite a tall order. Despite the escape routes, it hits those who have needed this support the most. All 5 of the 19 listed PSBs in India that have bulk deposits accounting for 30% or more of their total deposit base are in the league of small banks. If one includes banks for whom bulk deposits account for at least 25% of their deposit base, the list expands to 8.
There is obviously a clear incentive for the smaller banks to source a larger percentage of their deposits from a few select sources and run a comfortable banking service (see table 1). The spread between corporate and retail deposits has soared up to 3.5-4.5% till the last quarter (see table 2), and is even now at 1-2%, as a report by Kotak Institutional Equities shows. Since the cost of maintaining the funds is far less than that of adding small-ticket retail deposits, the banks have happily found their net interest margin running high. This also ensured that even when the regulator cut interest rates, these banks were not enthusiastic about mopping up retail deposits. Since on the investment side there is always the option to put in more than the necessary amount in treasury papers, life sort of revolved around a pleasant 3-6-3 routine: offer a 3% rate to depositors, lend at 6% and be at the golf course by 3 pm. This is one of the obvious reasons why despite the number of banks dotting the horizon, especially public sector ones (for instance, in President Mukherjee?s constituency), the differential benefit to retail customers has been practically nil.
Let?s just compare the balance sheet of one of these?Vijaya Bank?with a workhorse like SBI. Vijaya Bank has a deposit base less than 12th of SBI. Yet its bulk deposit at R39,700 crore is about a third that of SBI. Of the total R89,600 crore of deposits with Vijaya Bank as on March 31, 2012, 46% came from corporate deposits. Close after is ranked UCO bank, which too has sourced nearly 43% of its business from large corporates. Naturally, these banks will equate any expansion of their branches as something like a corporate social responsibility instead of a core banking activity.
This is not to say that sourcing of bulk deposits is frowned upon by law. In fact, there is a debate on what qualifies as a bulk deposit. The finance ministry has defined it as corporate deposits where banks pay higher interest than the card rate. But RBI defines them as corporate deposits that are generally R1 crore and above, with maturity of up to one year. Earlier, private sector banks like ICICI too have mopped up wholesale deposits from foreign financial markets. Those were necessary for these banks since they did not have a spread of branches to tap savings and current deposits. After 2008, however, these banks sharply veered away from wholesale deposits.
In contrast, even the smallest PSBs rapidly armed themselves with a huge pan-Indian footprint. Yet, if the SBI, PNB or BOBs of the world with a far larger deposit base can afford to keep their bulk deposits within very reasonable levels, it implies that the economy is actually paying a cost to keep the smaller ones in business as separate entities. If the three large banks are doing banking business then the overwhelming majority of the small banks, it would seem, are in a different line of business altogether. But the veneer of government ownership makes two distinct banking models look deceptively similar to the retail customers. This is also the key reason why the banking sector, despite being so crowded, offers a bland monopoly-like face to the customers.
It, thus, makes sense to club several of the smaller PSBs into a larger bank, turning them into effective business entities. As table 1 shows, it will take quite some doing for these smaller banks to effectively cut down bulk deposits in the current timetable. A plausible escape route could be to redistribute the bulk deposits into smaller accounts?in the past, some banks have done that. Basel III norms, as RBI Governor Subbarao has pointed out, will impose an annual cash set-aside of up to R20,000 crore by the finance ministry to recap all the PSBs. In today?s scenario, this is a huge cheque to write.
On the upside, the government can rejig the shareholding of smaller banks at far lower costs for the economy, since they are evidently not doing much of public banking. As some of them are nicely capitalised, merging them with the more stressed large banks can save some of the humongous payout. In a field with limited choices, this one?s worth taking.
subhomoy.bhattacharjee@expressindia.com