As India’s banking system is seeing strong credit demand but slowing deposit growth, profitability has become the sector’s defining challenge, said Prashant Kumar, managing director and chief executive, YES Bank.
In conversation with Mahesh Nayak, Kumar said capital is abundant, but liabilities are tightening, margins are under pressure, and fee income faces regulatory scrutiny. With credit-deposit ratios at historic highs and savers shifting to market instruments, banks must rely on cost efficiency, technology, and trust-led branch banking to sustain returns and attract long-term capital. Excerpts:
How do you reimagine banking in the near to medium term?
Capital is not a binding constraint today. Both public and private sector banks are well capitalised and positioned to support expansion. The real pressure point lies on the liability side — particularly mobilising deposits. That’s where the next phase of competitive differentiation will emerge.
You mentioned deposits as the biggest near-term challenge. Why is deposit mobilisation becoming so difficult?
For the first time, the industry’s credit-deposit (CD) ratio has crossed 80%. In private sector banks, it is closer to 90%. Meanwhile, deposit growth is only around 9–10%, and most of that is flowing into public sector banks.
The structural shift is clear: Household savings are not moving into bank deposits. They are moving into market instruments. If deposits don’t grow, banks must ask whether regulators will eventually be comfortable with CD ratios approaching 100%, with incremental credit funded through market borrowings. This is a fundamental question with no clear answer yet.
If deposit growth remains weak, what does that mean for funding costs and margins?
Margins will remain under pressure. If everyone is fighting for the same deposit pool, you cannot reduce deposit rates. On the lending side, corporates have access to debt markets, so they expect competitive pricing from banks. At the same time, regulators are rightly pushing for customer protection and transparency. That puts pressure on fee income as well. So if yields are under pressure, deposit costs are sticky, and fee income is constrained, the only lever left is cost optimisation.
With savers turning into investors, how can banks attract deposits again?
This is a global phenomenon. Even in advanced economies, deposits are not flowing into banks. Regulators there do not emphasise CD ratios the way we do; banks borrow more from markets.
India may eventually need to rethink its approach. One idea is to allow differential interest rates based on LCR outflows. If banks could price deposits based on LCR buckets, they could offer higher rates to stable retail depositors and lower rates to institutional depositors without increasing overall cost of funds. This could help retain retail deposits.
Where do you see the biggest levers?
Technology and AI will play a major role, especially in automating routine tasks. But this transition takes time and has social implications in a country like India. Still, if banks want to remain profitable and attract capital — both domestic and foreign — they must deliver sustainable return on equity (ROE). Without profitability, capital inflows will dry up. So operational efficiency is not optional; it is existential.
Public sector banks seem to be regaining market share. What explains their resurgence?
Their market share is not overtaking private banks, but the pace at which private banks were gaining share has slowed. PSBs banks have cleaned up balance sheets, improved asset quality, and strengthened capital positions. They also enjoy a structural advantage – trust. Depositors feel safer with government-owned banks, so PSU banks attract low-cost deposits effortlessly. Their CD ratios are lower, giving them more headroom for credit growth. Post consolidation, their cost structures have improved, and technology adoption has accelerated. So, they are now far more competitive than they were a decade ago.
Do we still need branch banking in a digital-first world?
Absolutely. While digital banking has become the default for transactions, branch banking continues to anchor trust. Customers hesitate to keep large balances in digital-only accounts; and high-value deposits, complex queries, and relationship-led decisions still require human reassurance. SMEs, too, depend on branches for cash handling, documentation, and advisory support. We continue to expand our physical footprint not for transactions, but to deepen relationships, attract stable deposits, and reinforce the trust that drives long-term banking behaviour.
We are seeing a rise in unsecured lending. Is this a sign of banks taking more risk?
Banks are cautious, but they also recognise that to grow, they must reach customers who previously lacked access to formal credit. A large segment of India — urban and rural — still remains under-served. The shift towards consumption credit is real. Earlier, loans were taken mainly for asset creation — homes, cars, businesses. Today, younger generations borrow for lifestyle, travel, dining, appliances, and day-to-day needs. This is aligned with global trends. Banks cannot ignore this. They must build strong underwriting models, robust collection systems, and cost-efficient processes. Without that, unsecured lending becomes risky.
Microfinance operates at high interest rates. Is that sustainable?
Microfinance reaches the last mile, but it is a high touch, high cost model. Field presence, frequent collections, and customer engagement make it expensive. That’s why rates are higher. If the sector is not profitable, it cannot attract capital. But if it is profitable, it is accused of exploiting customers. It’s a delicate balance. Transparency, efficiency, and responsible pricing are key.
Liquidity appears surplus today, yet bond yields remain elevated. Why is the market worried?
The 10 year G Sec reflects broader macro pressures beyond corporate credit demand. Elevated government borrowing, a wide fiscal deficit, currency management considerations, and firm global yields are keeping rates from softening even after a 125 bps repo cut. As long as government borrowing stays heavy, yields are unlikely to fall meaningfully. In such periods, corporates often revert to bank loans when they turn out to be cheaper than tapping the bond market.
Consumption demand seems strong. Do you expect this trend to continue?
Absolutely. This is a behavioural shift. Younger generations do not view borrowing as negative. They prioritise experiences — travel, dining, lifestyle — and are comfortable financing purchases. This is good for the economy and creates opportunities for banks.
Which retail products is YES Bank focusing on?
Our retail strategy focuses on Business Loans, Credit Cards, Affordable Housing, LAP for small entrepreneurs, and personal loans to salaried customers—segments with predictable income visibility and strong underwriting performance. We consciously avoid high velocity point-of-sale consumer durable loans, which require a very different, merchant integrated operating model. We also remain cautious on new car loans, large ticket auto financing, and low margin, highly competitive secured products like prime housing.
In the MSME and SME space, what exactly is the sweet spot for YES Bank?
Our sweet spot is lending between Rs 25 lakh and Rs 5 crore for MSMEs, and Rs 5 crore to Rs 25 crore for mid market SMEs, where growth, risk visibility, and profitability align best. These firms have stable cash flows and digital footprints yet still need responsive, relationship driven banking. They value speed, transparency, and flexibility—areas where we differentiate. We are not chasing very large corporate exposures or highly leveraged structures. Our focus is on cash flow based lending, not collateral heavy lending.