The banking sector in India is struggling with a deposit crunch in the current financial landscape. With rising competition, banks find it challenging to raise sufficient deposits to support their lending activities. To counter this, banks are adopting creative solutions to attract deposits and maintain financial stability.
As of September 6, the Reserve Bank of India (RBI) data reveals a significant gap between credit growth and deposit growth. Over the past year, bank credit expanded by 13.3%, outpacing the rate at which deposits have accumulated, which stood at 11.1%. This discrepancy highlights a growing challenge for banks as they struggle to raise enough deposits to support the increasing demand for loans.
Banking Sector Growth and Industry Insights
Small and Mid-Sized Private Banks Get Creative
Small and mid-sized private banks are getting creative to attract deposits as they compete with larger institutions to meet the growing demand for credit.
| Partnering with Fintech Companies | Lenders such as Suryoday Small Finance Bank, Yes Bank, and Jana Small Finance Bank are forming partnerships with fintech companies. These collaborations allow them to offer unique and flexible products to their customers, giving them an edge over traditional banking methods. |
| Higher Interest Rates on Fixed Deposits | Banks are also introducing FDs linked to the Reserve Bank of India’s benchmark repo rate. This allows depositors to benefit from rate fluctuations and offers a more dynamic investment option than standard FDs. |
| FDs Without a Bank Account | These banks now offer fixed deposits (FDs) that don’t require customers to open a traditional bank account, simplifying the process and attracting more customers. |
| Flexible Borrowing Limits | Another new offering is FDs with flexible borrowing limits. These deposits are tied to the customer’s deposit amount, giving them more freedom to borrow as needed. |
| Repo Rate-Linked FDs | To make banking more convenient, these institutions offer easier and more flexible withdrawal options, enhancing the customer experience and making deposits more attractive. |
| Easier Withdrawal Options | These institutions offer easier and more flexible withdrawal options to make banking more convenient, enhance the customer experience, and make deposits more attractive. |
The push for deposits comes as the demand for loans surges in a rapidly growing economy, leading to fierce competition among banks. But they’re not just up against each other. Banks also have to compete with equities, mutual funds, and insurance products, all of which are attracting household savings. In fact, for the past two years, bank credit growth has consistently outpaced deposit growth.
Smaller private lenders and small finance banks usually offer 2-2.5% higher interest rates than bigger banks. However, growing competition for deposits has reduced this gap to around 1%. Smaller banks can’t raise rates much more, as it would hurt their profits. As a result, depositors often choose larger, more well-known banks, pushing smaller banks to explore other ways to attract customers, according to experts.
This article explores the deposit crunch, its causes, and banks’ innovative strategies to overcome this issue.
Understanding the Banking Sector Deposit Crunch
Banks in India rely heavily on deposits as their primary funding source for loans and other activities. Deposits from individuals and businesses provide the capital banks need to issue loans, maintain liquidity, and support growth. However, in recent years, banks have faced significant challenges in attracting deposits. Several factors contribute to this ongoing deposit crunch:
- Decline in Savings Rates: A shift in consumer behavior, where individuals prioritize spending or invest in higher-return financial products like stocks and mutual funds, has reduced the overall savings rate.
- Increased Competition: Non-bank financial institutions (NBFCs) and fintech companies offer more attractive and innovative products, diverting deposits from traditional banks.
- Interest Rate Dynamics: Lower interest rates offered by banks on savings accounts and fixed deposits (FDs) have made deposits less appealing to customers, especially compared to other investment avenues.
Impact of the Deposit Crunch
The deposit crunch has a direct impact on banks’ ability to lend. Without sufficient deposits, banks struggle to maintain their liquidity ratios and meet regulatory requirements set by the Reserve Bank of India (RBI). This lack of liquidity limits their lending capacity, affecting overall economic growth.
In addition, the deposit crunch can lead to higher borrowing costs for banks, as they are forced to raise deposit interest rates to attract more funds. This, in turn, can result in higher lending rates, affecting borrowers and the overall credit market.
How Banks Are Innovating to Attract Deposits
Banks are adopting creative approaches to attract fresh deposits to address the ongoing deposit crunch. These strategies are designed to make their products more appealing and offer customers better incentives to place their money in traditional deposit accounts. In addition to partnering with fintechs and increasing FD rates, here are some of the critical innovations banks are employing:
1. Digital-First Banking Solutions
Many banks are embracing digital technology to make it easier for customers to open and manage deposit accounts. By simplifying account opening processes through mobile apps and online platforms, banks aim to attract tech-savvy customers. Digital banking services offer convenience and flexibility, encouraging more customers to deposit their funds without the hassle of visiting physical branches.
- Example: Yes Bank has introduced a fully digital savings account that can be opened in minutes through its mobile app. It offers features like zero balance requirements and competitive interest rates.
2. Targeting Niche Segments
To increase deposits, some banks target specific customer segments, such as senior citizens or rural populations. These segments are often underserved by larger banks, making them an attractive market for small finance banks. Banks offer specialized products, like higher interest rates on senior citizen deposits or easy access accounts for rural customers, to meet the unique needs of these groups.
- Example: Jana Small Finance Bank offers exclusive deposit schemes for senior citizens, with higher interest rates and flexible terms to cater to their needs.
3. Promoting Recurring and Systematic Deposit Plans
Banks encourage customers to adopt recurring or systematic deposit plans, allowing individuals to make smaller, regular deposits over time. These plans offer flexibility and ease for depositors, helping them build savings without needing a large upfront deposit. By promoting such schemes, banks can attract a steady flow of funds from customers who might not otherwise open a large fixed deposit.
- Example: Yes Bank has introduced recurring deposit plans with attractive interest rates, targeting young professionals and first-time savers looking to build wealth over time.
4. Increased Customer Engagement Through Loyalty Programs
Banks offer loyalty programs and bonuses tied to deposit accounts to strengthen their relationships with existing customers. These programs reward long-term depositors with higher interest rates, cashback, or exclusive perks, creating value for those who keep their funds with the bank.
- For example, some small finance banks offer loyalty bonuses for customers who maintain fixed deposits for longer terms, encouraging them to stay invested and continue depositing.
Role of RBI in Supporting The Banking Sector
The Reserve Bank of India (RBI) has also played a role in addressing the deposit crunch. The central bank has introduced several measures to support banks in raising funds and maintaining liquidity:
- Liquidity Support: The RBI has provided liquidity support to banks through measures like targeted long-term repo operations (TLTROs) and open market operations (OMOs), which allow banks to borrow funds at lower rates.
- Regulatory Relaxations: In response to the pandemic and the ongoing economic challenges, the RBI has relaxed certain regulatory norms, giving banks more flexibility in managing their liquidity ratios.
- Encouraging Digital Innovation: The RBI has encouraged banks to adopt digital banking solutions and embrace fintech partnerships to enhance deposit mobilization efforts.
Conclusion
The deposit crunch faced by banks in India is a significant challenge but has prompted innovative responses from the banking sector. By offering higher interest rates, embracing digital banking, targeting niche customer segments, and collaborating with fintechs, banks are finding creative ways to attract deposits and maintain financial stability.
While the deposit crunch is likely to persist in the short term, these innovations demonstrate the banking industry’s resilience and ability to adapt to changing market conditions. With continued support from the RBI and ongoing innovation, banks are positioning themselves to overcome this challenge and ensure sustainable growth in the future.
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FAQ
How are fintech tie-ups helping the banking sector meet the increasing demand for credit?
Fintech companies offer innovative solutions that streamline the loan application process and enhance risk assessment capabilities. Banks can partner with fintechs to develop digital lending platforms, use advanced analytics for credit scoring, and access alternative data sources to make more informed lending decisions. These collaborations can help banks reach a broader customer base, improve efficiency, and reduce the cost of credit.
Why are banks offering higher fixed deposit (FD) rates to attract deposits?
Banks must secure more deposits as credit demand rises to fund their lending activities. By offering higher FD rates, banks can incentivize customers to deposit their money with them, providing a reliable funding source. This strategy also helps to maintain liquidity in the banking system and supports economic growth.
What are the potential risks associated with increased competition among banks?
While increased competition can benefit consumers through lower interest rates and better products, it can also lead to risks such as excessive lending, asset quality deterioration, and systemic instability. To mitigate these risks, regulatory authorities must closely monitor the banking sector and implement appropriate measures to ensure financial stability.
How can banks balance the need for innovation while maintaining financial stability?
Banks must strike a delicate balance between innovation and risk management. While embracing new technologies and business models can help them meet evolving customer needs and stay competitive, they must also ensure their risk management practices are robust and aligned with regulatory requirements. This involves conducting thorough due diligence on fintech partners, implementing effective risk governance frameworks, and maintaining adequate capital buffers.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.
