Vault Matters: Banks may be slightly shortsighted on their deposit plans

What is of concern is the manner in which deposits are being mobilised.

The scramble for deposits, which started in mid-2023, is far from ending. If any, an intensified war still seems to be playing out. Perhaps to banks’ advantage, the only silver lining is thing that somewhere deposit rates seems to have settled down a bit.

The rush we saw to offer higher rates of interest, which in case of few banks was even of 8.1 percent or upwards for a brief period from April to August this year, doesn’t seem to be the necessity now to lure depositors. This is a good sign as it would help keep a lid on cost of funds for banks.

Yet, what is of concern is the manner in which deposits are being mobilised. There is a concerted effort across banks to bulk up deposits at the shorter end of the curve or for lower duration. In other words, the two – three-year deposit tenure remains the most attractive product across banks. While banks have the liberty to decide their liability programs and the tenure of deposits, which they believe, is critical to support their balance sheets, the problem with this approaches that the more money keeps flowing into the shorter tenure products, how does a bank really build a long-tenure loan asset.

To be fair, the intervention measures which came from the Reserve Bank of India in November last year has helped moderate growth of unsecured loans. Hence compared to the earlier apprehension that deposit money was being used to fund unsecured loan growth is less of a concern now. Yet, if the objective is to build healthy longer tenure loan assets that doesn’t seem to be supported by the kind of deposit mobilisation plans which are currently underway.

The kind of retail assets presently being built out across banks in the retail segment are gold loans, vehicle loans (new and used) and secured business loans. Among the three, gold loan has the shortest tenure. While on paper these could be a three-year product, the book could run down within 12 to 18 months. In some cases, even in six months. Vehicle loans may be a 4 – 7-year product but more or less repaid in 3 – 4 years. Secured business loans are three-year products and usually rolled over for longer tenures. But if the intention is to build home loan and term loan assets, banks might have to think beyond raising deposits beyond the 2 – 3-year time frame. That doesn’t seem to be happening at the moment.

The perils of creating shorter tenure assets is that these loans largely feed into the consumption demand, which in turn can work counterproductively in the efforts to curb inflation. Short-term loans seldom result in creation of long-term assets which have a natural money multiplier effect. Therefore, while the regulator is keen to get inflation under control, within the 2 – 4 percent mark, the manner in which deposits are being raised and loans are being consumed might dampen that objective.

This brings us to the question: is the deposit mobilisation plan of banks really effective from an asset building perspective. Answer to this will lie in the strategy that each bank wants to draw up. However, eventually this could be matter of concern to the regulator if inflation remains stubborn.