As per the mid-term review of annual policy statement for the year 2004-05, aggregate deposits of scheduled commercial banks rose 6.4% (Rs 96,598 crore) as against an increase of 8.3% (Rs 1,06,782 crore) in the corresponding period of the previous year.
The lower deposit growth this year could be attributed to reduction in non-resident Indian (NRI) deposits with the banking system.
How are banks attempting to augment their resources in order to meet the increased appetite Despite their recent attempts to attract more resources by hiking deposit rates by as much as 50-75 basis points, the moolah has not begun to flow-in.
While most bankers are unanimous, that it is too early in the day to read the trends (banks started raising deposits rates from last fortnight), they agree that banks need to look for alternative sources of cheap funds, even as they improvise their existing liability products to retain their spreads.
Says Corporation Bank CMD Cherian Varghese: Deposits are the cheapest resources for the banking system. With banks advances growing faster than deposits, they need to look at alternate avenues for raising resources.
IndusInd Bank managing director Bhaskar Ghose supports this premise. He said: As growth in deposits is not to the extent of credit offtake, banks may consider alternate methods of raising resources to catch up with the increased credit offtake, such as securitisation of assets.
One of the most attractive avenues for banks in the past had been resources garnered via the non-resident term deposits.
It may be recalled that when the country was experiencing a balance of payment crisis in the early 1990s, NRI deposit schemes were given tax benefits to attract precious foreign exchange. This became an important source of funds for banks. Expatriate Indian community found NRI deposits as an attractive option on account of the higher interest rates as compared to similar products overseas.
Fast forward to fiscal 2003-04, a vastly different scenario emerged. The Reserve Bank of India (RBI) decided to withdraw the sops enjoyed by this product. It began by capping the interest rates on these accounts, effecting a step-wise reduction by 150, 250 and 50 basis points, till it was brought at par with LIBOR/SWAP rates.
Says ICICI Bank head of NRI services P GopaKumar: The impact was immediate as NRIs stopped deploying their funds in such accounts. Moreover, following their maturity, the banking system is also witnessing withdrawal of some of the NRI deposits parked last year.
Statistics from the latest (November) monthly bulletin of the RBI shows that fiscal 2003-04 saw an aggregate inflow of funds into NRI deposits to the tune of $3.6 billion, as against an inflow of $2.9 billion recorded in the preceding fiscal.
The fiscal 2004-05 has seen a net outflow of $1.2 billion during the period between April and August as against an inflow of $2 billion recorded in the corresponding period last fiscal.
Some bankers maintain that with the RBI hiking the rates by 50 basis points over and above the LIBOR/SWAP rates, some of the sheen that NRE deposits lost may return.
Others, however, feel differently. Mr Ghose says: The increase in deposit rates have certainly not impacted the growth of deposits. NRI deposits are no more an attractive option for expatraites, as similar options overseas are more structured and better priced.
Bankers also reason that the finance ministers announcement in Budget 2004-05 to tax interest income on NRE deposits, with effect from the beginning of fiscal 2005-2006, has further dampened the inflows, depriving banks of the much-needed funds.
Standard Chartered Bank chief financial officer Vishu Ramachandran too joins Mr Ghose in voicing his reservations on the issue.
He says: The proposal to levy tax on interest earned on NRE deposits is likely to be a critical dampener. This needs to be resolved.
According to the RBIs latest weekly statistical supplement, aggregate bank deposits for the fortnight ended November 12, 2004, fell by Rs 20,257 crore to Rs 15,96,617 crore. Comparatively, total bank credit grew by Rs 7,241 crore to Rs 9,95,517 crore in the same period.
Also consider data relating to growth in bank credit and deposits between April and Septemeber of the current fiscal for scheduled commercial banks (See box). It is clearly evident that while bank deposits grew by 6.2%, bank credit grew by 10.6% (Source: RBIs November 2004 monthly bulletin).
While bankers like Mr Ghose admit that there may arise a situation of credit-deposit mismatch, they are quick to point out that banks have already anticipated that and are taking stock of their respective credit-deposit situation, and are re-working strategies in their Asset Liability Committees (Alco) to circumvent the pitfalls.
As Mr Ramachandran says: In StanChart, the approach to managing credit-deposit mismatches has been strategic and tactical, and is governed by principled and disciplined Alco Management.
It has not been a smooth sailing for banks. Even though the Indian consumer still regards bank deposits as an attractive and relatively safe option, this belief is fast eroding in view of increased awareness about investment products as well as a betrayal of trust due to some recent episodes of insolvencies, siphoning off of funds, runs on banks, etc.
Second, fixed deposits are competing with mutual funds and small savings.
In this scenario, bankers are unanimous in feeling that more structured products would be required to attract funds, to keep their deposits moving in tandem with growing disbursement demands.
They feel that banks still have substantial excess investments and these can be liquidated to meet credit growth.
There is a window of overseas borrowing available apart from various domestic refinance facilities. Securitisation of assets is another attractive option for banks to raise funds, till such time as growth in deposits begins to take off.
But that, to a great extent, depends upon reversal of some external (rising oil prices) and some internal (inflation) factors.