Are weak public sector banks discouraging term deposits?

The weak public sector banks (PSBs) have been discouraging term deposits because of lower capital in their balance sheet, according to market experts.

There are close to a dozen banks that are either part of the Reserve Bank of India's (RBI) prompt corrective action (PCA) plan or have just come out of it. These weak banks have higher non-performing assets (NPAs), falling profitability and lower capital levels in the books.

The negative growth numbers under the term deposits are visible in some of the banks. The weak PSBs, which saw negative growth in their term deposit growth in the just concluded fiscal 2018-19, are Allahabad Bank, Corporation Bank and IDBI Bank. The IDBI Bank, where LIC has taken a majority stake, has seen an 8 per cent fall in its term deposits from Rs 1,55,830 crore in 2017-2018 to Rs 1,41,760 crore in 2018-2019. Allahabad Bank saw its term deposits fall by 6 per cent from Rs 1,15,185 crore to Rs 1,08,264 crore in the same period. Mangalore-based Corporation Bank has also seen a de-growth of 2.27 per cent from Rs 1,29,193 crore to Rs 1,26,261 crore. However, the savings and current account deposits, which are low cost, have remained a focus area for the banks.

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The lower term deposit growth numbers are partly contributing to lower deposit growth in the system. There is already a mismatch as the single digit deposit growth in the system is not able to keep pace with the credit growth, which is gradually picking up.   

"If you don't have capital in the balance sheet, you cannot lend because of risk weights that consume capital. As a result, you tend to restrict your balance sheet size," says a banker. In fact, some of these banks have also kept their term deposit rates lower to discourage depositors. These banks are awaiting more capital infusion from the government to start normal operations as the current capital is just enough for NPA provisioning in view of the deterioration in asset quality.

Experts suggest these banks have good footprints and also loyal customers in the hinterland and semi-urban areas but the capital shortages are forcing these banks to put a halt on high-cost term deposits. In fact, many weak banks are also reducing their reliance on bulk deposits. This is also an opportunity for private banks and also small finance banks that have kept their deposit rates 50 basis to 100 basis points higher. Going forward, the competition for a term deposit is going to be tougher as new banks, which are targeting high yielding under-served segments, will keep the rates at elevated levels. In addition, the mutual funds are already attracting a lot of depositors for better returns.

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There are some who say that people are also scared in putting money in weak banks, which came under the Reserve Bank of India's prompt corrective action (PCA) framework. While there are lending restrictions on such banks, the deposit window was always open. They say that the small depositors are not very comfortable with putting their hard-earned money in these banks.