Not being depositor-friendly costs PSBs trillions

Public Sector Banks started to play with renewal terms on deposits, lost 9% of the market share

Public Sector Banks (PSBs) once treated depositors with reverence. Not any longer. Interest rates are falling and the rules for depositors are no longer friendly. So, there is a growing trust deficit, and depositors are moving away.

As a result, the deposit share of PSBs has fallen from 78% to less than 65% in the 10-year period 2011-2020. The private sector banks seized the opportunity and have more than doubled their market share during the last decade and now account for nearly 30% of total bank deposits. As PSBs struggle with bad debts, their lending slowed, but what is the justification for such a precipitous drop in deposits?

The total deposits of scheduled commercial banks are around Rs 139 lakh crore as of 2020, including demand deposits, saving bank deposits and term deposits. Had the PSBs not lost 9% of the market in the last five years, they would have had Rs 12 trillion more as deposits. They would not need the government to pump in over Rs 3 lakh crore of taxpayers’ money to rescue them. However, the PSBs alone are not to blame for this continuous exodus of depositors. Short-sighted policies of the department of banking and the RBI over the past decade are equally to blame.

One of them is the policy on fixed deposit (FD) renewal, which empowers banks to hold on to depositors’ money after maturity, virtually without crediting interest – a policy that has badly hurt depositors during the pandemic because the lockdowns have restricted mobility in the last 18 months. While private banks reached out to depositors to renew deposits, PSBs, especially the merged entities, made it doubly difficult.

The July 2021 circular of RBI on ‘interest on overdue domestic deposits’, an extension of its May 2016 circular, has made it easier for banks to hold on to unclaimed matured deposits as ‘free lunch’ -- a source of low-cost funds to the banks at the depositors’ expense. It states that “If a term deposit (TD) matures and proceeds are unpaid, the amount left unpaid with the bank shall attract the rate of interest as applicable to savings account or the contracted rate of interest on the matured TD, whichever is lower.”

A decade back, the interest on deposits that was prevalent during the FD period was paid if the deposit was renewed even a few months after maturity. That was changed subsequently as FD interest rates started to plummet. So, if depositors forgot to renew deposits at the time of maturity, they would get paid not at the previous but the existing deposit rates for the intervening period once they renewed the FD. That was a fair practice as the depositor was getting a proper return on investment. However, a decade back, the bankers started to get greedy, with the regulator’s approval.

New provisions were introduced. You had to choose the options for ‘automatic renewal’ and ‘automatic credit to the depositors savings bank account’ if you wanted your deposits renewed or transferred back to your account. The PSBs would tell you about these new clauses only when prodded, as a result of which large amount of depositors’ money stayed as ‘free lunch’ for the PSBs once they matured. This was the first move that was not depositor-friendly. The second was when the RBI decided that banks would pay only savings interest on the FDs not renewed.

Later, the PSBs stopped informing depositors about when FDs were maturing and started keeping it separately as ‘unclaimed’. Only when customers claimed them would they credit the amount back to their savings account and give the interest as per the savings rate, which was a pittance. The private sector banks, however, kept calling depositors and even turned up at your door if you had not renewed your deposits, while the PSBs made it a headache to renew deposits. Depositors realised what was happening. They started fleeing.

The situation is even more grim in the PSBs that have been merged of late, as the banks are insisting on fresh KYC before issuing chequebooks, ATM cards and crediting deposits to the accounts. The demands for linking PAN to Aadhaar every year or two by the banks, especially during the pandemic, is nothing less than harassment.

There is over Rs 82,000 crore of unclaimed depositors’ money lying in bank accounts, provident fund, insurance and mutual funds. But no regulator is making an effort to return the depositors’ money. Unfriendly policies are causing depositors to flee PSBs, and the loss is many times what they would gain by usurping depositors’ funds. Banks must turn depositor-friendly and have fair regulations to attract depositors. Else, they stand to lose the most.

(The writer is a journalist and author of three books on economic governance)