What banks can do with rising deposits

People’s deposit works like elixir for banks. Banks utilise the deposits to spread their loan business and invest them for profit while taking various measures to protect the depositors’ money. As Covid-19 has slowed down economies the world over, it has a negative impact on the Indian banking sector also. Many economic activities have dried up, which has squeezed banks’ loan business. According to the RBI, the loans and advances of banks have plummeted to Rs 102 lakh crore vis-à-vis the aggregate bank deposit of around Rs 143 lakh crore in September 2020. The ideal credit-deposit ratio is around 80-90% in a market economy. Credit shrinkage adversely affects the income of banks and the interest income of depositors. The banks’ credit flow has shrunk by Rs 1.48 lakh crore despite RBI reducing repo and bank rates to 4% and 4.25% respectively. When the Indian economy is integrated with the global economy, financial crises are bound to return from time to time as it has happened before. In view of the present financial crisis, the banking sector has to reorganise its loan and investment portfolios for a moderate profit.

Despite banks offering low interest rates varying from 2.7% to 5.5% on various deposits, people still prefer to save their money in banks due to income uncertainties. The fixed deposits in banks increased by Rs 4.33 lakh crore in the two months between March 27 and May 22 when the lockdown had brought the economy to a standstill. Indian households saved Rs 15.62 lakh crore in 2019-20, compared to Rs 13.73 lakh crore in 2018-19. Among the various deposit schemes, the zero percent interest on Current Account deposits and 2.7-3% interest on Savings Accounts (the CASA deposits) are like gold mines for the banks; they give banks enough room to invest for profit.

A dedicated survey of potential in different economic sectors would prevent banks from credit overflow or low credit flow. In Covid-19 time, banks can explore new areas to lend to and adopt development banking to nurture the credit absorption capacity of different sectors. For example, there are about five million artisans in India who add high value to their products. Banks can form ‘artisan clubs’ to improve the credit absorption capacity in the handicraft sector. The artisan club would be a small group of artisans promoted by a bank branch for its own benefit. The club would help banks explore potential new areas to channel credit into; it would help banks in the recovery drive and identify quality borrowers. The bank in coordination with the club, would invite marketing experts, designers, IT professionals, exporters and senior artisans who can guide the village artisans in innovating new products and in marketing them.

Similarly, ‘farmers clubs’ among villagers can improve the performance of agriculture, fishery, horticulture, organic farming, zero budget natural farming, tourism and tap the huge potential of the unorganised sector. Banks can explore the vibrant but unorganised eatables sector where people have a steady income. More than credit, the majority of the illiterate and semi-literate small entrepreneurs need proper guidance from bankers, good governance and safety to increase their incomes.

The risk involved in lending big loans to corporations continues to haunt banks which are under pressure to lend and at the same time have to comply with a maze of regulations. How to distinguish good corporates from the unscrupulous and wilful defaulters is the biggest challenge before the banking sector, which holds 70% share of the Indian financial sector.

The two new farm laws -- Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020, and the Farmers Agreement of Price Assurance and Farm Services Act are likely to attract private investment into both farm and non-farm sectors, particularly in the area of food processing, in the cultivation of cash crops, in the supply chain and in various agriculture-allied activities like fishery, horticulture, organic farming, drip irrigation, cold chains, godowns, waterways and small farm activities, etc. With improved governance, banks can reap the benefit when private players enter the agriculture sector.

The coronavirus crisis has given banks idle time to finetune their housekeeping skills, meet the training needs of staff, focus on research and innovation, improve cybersecurity and adopt new information technology, etc. In the banking sector, the majority of staff above 55 years are not computer savvy. In the core banking environment, top bankers should be equipped with a daily updated Management Information System (MIS) and should be in a position to tell the NPA status and project credit potential of economic sectors instantly. Bankers should have advanced computer knowledge to monitor loan and investment activities in an efficient manner.

The pandemic-related crisis has created educated unemployment which can lead to cyber frauds and documentation fraud. Every bank should have a fraud detection team to nip fraud attempts in the bud. The crisis has also brought more savings to banks than in several years before it. Now, it is the responsibility of the banks to protect the depositors’ interest and at the same time to make the best use of people’s savings.