Banks struggle to attract deposits as customers chase high return equity-linked products

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Similarly, the MD&CEO of a private sector bank, who did not wish to be named, said the bank’s customers are finding better returns on their investments in mutual funds and other instruments.

“We are looking at a trend where the customers are finding good returns on their investments in mutual funds. But there are risks too in those instruments,” he said.

Jaimin Bhatt, Chief Financial Officer (CFO), of Kotak Mahindra Bank, also acknowledged the pressure to raise deposits. “Yes, there is a challenge in deposits and to that extent, yes, we are taking all kinds of steps,” Bhatt said at the bank’s third-quarter earnings call.

MFs Vs deposits

The latest data from the Association of Mutual Funds in India (AMFI) showed that investment inflows into equity mutual funds hit a 22-month high in January 2024, led by sustained investments in sectoral, small, and mid-cap funds. Net equity mutual fund inflows rose 28 percent to Rs 21,780.56 crore in January, the highest since March 2022, the data showed.

And on the deposit front, some of the top banks have shown a fall in total growth. For example, Bank of Baroda’s (BoB) total deposits in the October-December quarter of the financial year 2023-24 fell to Rs 10.67 lakh crore from Rs 10.74 lakh crore sequentially.

The State Bank of India (SBI) showed muted deposit growth during the same period. The total deposits of the bank stood at Rs 47.62 lakh crore, growing merely by 1.5 percent on a sequential basis. During the same period, Kotak Mahindra Bank’s deposits grew by merely 1.91 percent.

What analysts say

Vijay Singh Gaur, Lead Analyst, at CareEdge, said that in the past few months, due to solid performance in the equity market, investments have increased. “Mutual funds have seen a surge in investments from customers. But the equity market, which has been performing well the past few months, has also seen some funds inflow compared to deposits in banks,” Gaur said.

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Banks gear up to the competition

To lure depositors, banks have come up with special deposit products and schemes offering higher rates of returns for certain tenures. While banks continue to focus on growing organically through more branches, new products and schemes will be the focus for banks to garner more deposits, bankers said.

For example, the country's largest bank, State Bank of India, in December 2023 raised interest rates by 25 bps on FDs below Rs 2 crore maturing between three and five years.

And BoB, in January 2024 launched the Bob 360 Deposit Scheme, a special short-term retail deposit scheme offering interest rates of up to 7.60 percent per annum for 360 days, which includes 0.50 percent per annum for senior citizens.

Chand of BoB said that the bank is optimistic about optimizing the deposit front with a series of new products. “We have launched different products on the savings and current account side just to meet the needs of different customer segments in this market and try to get them by offering some differentiated products,” Chand said.

The country’s largest private sector bank, HDFC Bank, is targeting its home loan customers for garnering deposits. Arvind Kapil, Head of Mortgage Business at the bank said that the home loan business has seen around 80 percent of incremental disbursals going to customers having a savings account.

“Pre-merger, about 30 to 35 percent of incremental disbursals were to customers with an HDFC Bank savings account. This has reached about 80 percent of incremental disbursals, post-merger. This has helped us to get deposits,” said Kapil.

Bhatt of Kotak highlighted that the bank has a new product, ActivMoney, a sweep deposit facility for customers, which has gained good traction. “ActivMoney happened about six months ago and we've seen big traction on that. We had reasonable growth both in the previous quarter and in this quarter,” Bhatt said.

Brokerage house Jefferies, in a note in December 2023, said that the uptick in bank deposit growth to 13 percent year-on-year (YoY), the highest in 6 years, has lowered the gap with credit growth. "With this, the wedge between banks' credit and deposit growth has halved from over 700 bps last year to 300 bps now. But, still, the gap is negative, and securing funds for growth will continue to be a challenge for banks," the brokerage firm highlighted.

Gaur of CareEdge highlighted that the popularity of returns in instruments other than bank deposits would make it difficult for banks to attract CASA and other deposits. “Deposit accretion would see some challenges ahead too as long as customers find good returns on their investments in mutual funds and other instruments,” Gaur said.