Banks need to change the way they attract deposits: Report---Business Standard
Rising segment opting for investments in mutual funds, insurance, real-estate, commodities
In a scenario when fixed deposit rates in the banking sector are set to fall further, banks might have a tough time in attracting deposits, says ‘Indian banking – the engine for sustaining India’s growth agenda’ on the sector from the Indian Chamber of Commerce and KPMG, the consultancy. It says more and more investors are looking at other investment avenues, such as mutual funds, insurance, real estate and commodities.
“While a rise in consumption is a given, all savings and investments going to banks is not. Banks would have to strive hard to attract deposits in the future, as the rising segment opens to other avenues for savings and investments such as mutual funds, insurance, real estate and commodities,” it says.
However, bankers disagree. “There is much competition from other investment avenues but banks will not be in a hurry to cut their deposit rates in the medium to long-term maturity tenures. They might do so in short maturity tenures,” said a senior official with a public sector bank.
The report says banks will have to revisit their strategies for attracting current accounts and savings accounts and term deposits. “Most banks will need to start putting together strategic plans and identify teams to focus on deposit raising, and move from the model of servicing walk-in customers to aggressively pursuing new customers through innovative bundling, promise of better returns, higher levels of customer service and attractive rewards programmes,” it said
“While a rise in consumption is a given, all savings and investments going to banks is not. Banks would have to strive hard to attract deposits in the future, as the rising segment opens to other avenues for savings and investments such as mutual funds, insurance, real estate and commodities,” it says.
However, bankers disagree. “There is much competition from other investment avenues but banks will not be in a hurry to cut their deposit rates in the medium to long-term maturity tenures. They might do so in short maturity tenures,” said a senior official with a public sector bank.
The report says banks will have to revisit their strategies for attracting current accounts and savings accounts and term deposits. “Most banks will need to start putting together strategic plans and identify teams to focus on deposit raising, and move from the model of servicing walk-in customers to aggressively pursuing new customers through innovative bundling, promise of better returns, higher levels of customer service and attractive rewards programmes,” it said
Should Interest rate come down ?
I am resubmitting my views expressed on 30.10.2009 which still hold good.
Everyone at top places is talking of recovery in economy and for this purpose they talk of low interest rate to create more demand for car or bike or for house. Stimulus package is extended to bank by reducing CRR so that banks have sufficient liquidity to lend to auto and real estate sector even at sub PLR.
Who is purchasing houses, flats or commercial shops?
Whether poor and downtrodden and even medium class people are at all getting any benefit from stimulus package or so called recovery in the economy despite global slowdown.?
Whether declining interest rates are conducive for real and consistent GDP growth?
How majority of population will survive who save and survive on interest income?
Certainly rich and upper middle class people whose number one annual income is at least more than four lacs. Because only then he can bear the expenses of his family and save enough to buy a house or a bike or a car and can afford the subsequent expenses. Of course person mostly with number two income can afford buying a house or a car even if his annual pay is only one lac or even lesser.
Therefore lower interest rate regime will benefit only upper middle class and rich people of the country who are either in service or in business or trading in house or bike or car. Both consumer and manufacturers in these lines will be happy if the interest rates go down further.
It is to be noted that interest payable on deposits by banks has already come down from 11% to 5.5% in many banks during last one year. Actual beneficiary of reduction of interest rate directly or indirectly is available to only and hardly 20% of total population of the country.
More than 80% of the population whose livelihood depends on interest income (pensioners, farmers, retired persons etc) or whose annual income is less than one lac a year and 15% of population whose annual income lie between one lac to four lac are now crying and facing enormous difficulties in meeting their family expenses. Such poor, downtrodden and middle class persons cannot dream of buying a house or a bike or a car. At best they can get some unskilled job of labour in the house of rich persons who take hard work but hesitate to pay sufficient money in wages. They are facing considerable erosion in their interest income, almost halved and at the same time their expenses on the same basket of commodity, which they normally consume for survival, have doubled due to abnormal price rise. Their poverty has been increasing day by day and riches have been growing richer and richer. The more profit margins corporate houses realize on their products from buyers of house or a bike or a car, the more successful businessmen they are considered and even government as well as stock market admire such trade houses.
As a consequence gap between the riches and the poor is widening day by day. Situation is becoming alarming and inviting violent movement against the exploiters. Days are not far when government will have to take into consideration the misery of those who survive on interest income and RBI will have to put stop on falling interest rates.
Government will have to put brake on increasing profit margins of traders, manufacturers and other service providers to check rising prices of all essential commodities. Profit making agenda of the governments and the consumerism of top 5% of population cannot afford to ignore welfare of society at large constituting residual 95% of the population.
Person who are advocating further fall in interest rates, who are indulged in profit making and creating artificial price rises in all essential commodities by hoarding are inviting nothing but social upheavals, social unrest and disturbance in law and order and ultimately violence all where.
Further there are some economists and heads of businessmen organizations like FICCI who are advocating further fall in interest rate on lending by banks. Indirectly they are advocating further fall in interest offered by banks on deposits they accept from customers. They plead that investment in new projects will become economically viable which were not economically viable under high interest rate regime.
I would like to add here that 80% of investment in business comes from public savings in India and survival of Indian business and trade do not depend on external commercial borrowings or foreign direct investment or any aid from International financial body. Existance and prosperity of Indian GDP largely depend on Indian savings and not on foreign borrowings.
As such when interest rate falls to an undesirable low extent, this will lead to clear cut disincentive for those who tend to save out of what they earn. When growth rate in savings fall it will adversely affect the investment capacity of the government and also welfare schemes of the government. All plans on development formulated by Government of India in their budget or in five year plan will fall flat if people save less and start spending more and more in the same way as Americans spend in USA.
Obviously sharp and drastic fall in interest rate on deposits will strike the root of economy gradually and in turn invite the same problem which USA is facing and which has caused global slowdown and economic recession.
Some bankers and economists plead that due to high lending rates borrowers are not able to survive and their projects fail. It is also said Banks assets become bad and Non- performing due to interest burden.
I would like to mention here that 70% of lending made by banks is sub PLR. In other words one can say that major chunk of credit made by banks to industrialists, exporters, home seekers, students seeking education loan, buyers of vehicles and houses and farmers is at rate below than Prime lending Rate (PLR) or bench Mark Prime lending rate (BPLR). It is also bitter truth that 90% of non-performing assets pertain to those borrowers who were financed at sub PLR rates.
As such plea of financial experts that high interest rate is the root cause of NPA and high interest rate is not conducive for GDP growth is not true and believable. Moreover such huge erosion in interest income of a considerable large section of Indian population as occurred during last one year will definitely pull down demand and hence adversely affect the sustainability of profit of manufacturers and industrialists.
To add fuel to fire, abnormal rise in prices of all essential commodities is killing the purchasing capacity of Indian mass in general. Impact of both may prove to be detrimental for sustainable growth as also for peaceful survival of poor and average income Indians.
It is therefore the need of the hour to ponder over the structure of interest rate applicable on deposits and lending and also whether freedom to bankers to decide their interest rates is suitable and beneficial for overall growth of the Indians and health of the Indian economy.
High interest rate is of course not conducive for creation of positive environment for industrial growth or farm production.
But the million-dollar question is how much lowering of interest rate is justified and suitable for maintaining equilibrium not only in the economy but also for maintaining social peace. The point to be considered here is complete freedom to bankers on interest rate is more beneficial or uniform rate structure decided by RBI in union with need of the Nation is the necessity of the hour to avoid unhealthy competition and to avoid unhealthy rate war
Further to add fuel to fire there is no growth in deposit in proportion to what is needed for growth in credit and what is needed for growth in the economy as envisaged by Finance Minster in various policy books. In order to attract deposits in their fold and in order to keep asset liability mismatch in control , heads of various banks have already started increasing interest rate on deposits.
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