By Nantoo Banerjee
Union Finance Minister Nirmala Sitharaman’s advice to government-controlled banks to launch special drives to step up deposit mobilization to catch up with the demand for loans may give a wrong impression that the public sector bank (PSB) management does not know the basic principles of banking. How can a PSB mobilise enough deposits when their interest rates on fixed deposits (FDs) vary from as low as 4.50 percent to 5.50 percent? Small banks and finance companies offer nearly double the rates for FDs. The maximum FD interest rate offered by these PSBs, with the exception of Bank of India, for a period varying from seven days to 10 years is 6.5 percent. After income tax deduction at source, the return on FDs from most PSBs could be around anything between 4.05 percent and 5.85 percent.
Among the scheduled PSBs, the Central Bank of India offers the highest FD interest rate up to 7.45 percent on a tenure of 444 days. It is no wonder that the deposit growth with the PSBs is falling. This is putting the PSBs under severe pressure to meet the surging demands for loans. These banks are witnessing a peculiar trend with lending growth surpassing deposit growth. Contrary to the practices followed by government-controlled big banks, smaller private banks offer flexibly higher FD rates. Among them are: IndusInd Bank (8.25 percent), DCB Bank (8.55 percent), Yes Bank (8.5 percent), SBM Bank (8.75 percent), RBL Bank (8.6 to 8.85 percent) and Small Finance Bank (9.5 percent).
The government is clearly responsible for the unhealthy credit-deposit ratio being witnessed by large banks. Banks are being forced to keep the lending rates low to apparently push the expansion of big business and industry. Or, is it to benefit a select section of industry and business houses which are flourishing on cheap borrowing? The bank rate is fixed by the RBI in consultation with the government. The biggest beneficiary of the low lending rates are some of the big business houses, including the Ambanis and Adanis. Reliance Industries (RIL) leads the pack of India’s most-indebted companies with a hefty debt of around Rs.3.14 lakh crore. The Gautam Adani-led business group reported a gross debt of Rs.2.41 lakh crore in 2023-24, up from Rs.2.27 lakh crore in the previous financial year. Others include NTPC Limited, IOC, ONGC, Power Grid, Vodafone Idea and BhartiAirtel, all grappling with substantial debts.
Normal business borrowers are less fussy about the interest rates. They are prepared to pay more for quick loans. And, their lenders are quite happy to raise loans from the public offering much higher interest rates at attractive terms such as monthly, quarterly and half-yearly interest disposal. Many of them offer annual interest rates up to nine percent and more. These non-banking companies include Bajaj Finance, Cholamandalam Investment and Finance, Shriram Transport Finance Company, Power Finance Corporation, HDB Financial Services, Mahindra & Mahindra Financial Services, Muthoot Finance, Aditya Birla Finance and Tata Capital Financial Services Ltd. This explains why FDs are steadily moving away from big banks to other finance outlets.
While cheaper bank credit has helped big business houses expand their profits during the last 10 years, it has hardly helped fresh greenfield industrial investments creating new jobs and bringing a wholesome growth of the economy. The rising corporate profitability is hardly leading to business expansion in the form of new investments in new projects. Going by the past records, cheaper bank credit had rarely led to higher industrial production. On the contrary, higher bank rates hardly impacted industrial investment and output negatively. For instance, in 2007-08, the RBI repo rate went up to 7.75 percent while the industrial growth rate was over 9.2 percent. Last year, industrial growth was 9.5 percent with the repo rate at 6.5 percent. Low bank deposit rates are driving away cash to other lucrative sectors of investments such as non-banking finance companies, stocks, mutual funds and gold.
India’s big banks may continue to face the deposit crunch if the government and the RBI insist on lower lending rates. Merely advising banks to adopt changes to boost deposits will not help solve the widening credit-deposit gap in the system. Banks should be allowed the freedom to determine the deposit and credit rates to play effectively in the market. This is more so at a time when customers are ready to borrow heavily, putting pressure on deposit-hit banks.
It may be interesting to note that in 1992, interest rates on fixed deposits were fully deregulated. Their returns were no longer correlated with their maturity. Any deposit placed for more than 46 days was eligible for interest payments of up to 13 percent from banks. The unusual action did not affect the profitability of banks. Nor did it affect the industry and market demand. In fact, the industrial growth, which recorded the sharpest fall to 0.6 percent in 1991-92, started spiking from 1992. It exhibited a rising trend from 1992-93 registering an overall growth of 2.3 per cent during the year, six per cent in 1993-94, 9.4 per cent in 1994-95 and further to 12.1 per cent in 1995-96, providing a big boost to the IMF-World Bank prompted first major economic reform in the country. Few will deny the fact that FDs have remained one of the most trusted and popular investment options in India. Traditionally, the people had favoured banks and the post office for their FDs.
The gradual shift of FDs from large banks to non-banking financial outlets will further weaken the business of the PSBs although it will have no impact on small and mid-size borrowers. Incidentally, the RBI, in its report, noted that in 2022-23, non-banking financial institutions (NBFIs) exhibited robust balance sheet growth, accompanied by improved asset quality and enhanced capital buffers. To give an example of how NBFCs are cashing in on public sector banks’ deposit slowdown, it may be noteworthy to relate the performance of Bajaj Finance Limited (BFL), one of the country’s leading NBFCs.
As of March 2024, BFL had 83.64 million customers and assets under management of ₹330,615 crore. The company, a subsidiary of Bajaj Finserv Ltd, has a presence in 3,504 locations across India, including 2,136 locations in rural and smaller towns and villages. The triple A-rated Bajaj Finance offers FD rate up to 8.65 percent. The government and the RBI are fully aware of the fact that the FD slowdown with big banks has come as a blessing to these NBFCs. Their inexplicable inaction has been a matter of concern for the bank management as well as all key stakeholders. (IPA
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