When deposits become 'assets' of banks

Offering a higher interest rate is an easy but costly solution. It's time for banks to innovate

- TAMAL BANDYOPADHYAY

My neighbour, Mr Fernandez, has resumed his habit of visiting bank branches. A super senior citizen, he earlier used to visit the branches often. But he stopped as branch staff started hounding him, selling mutual funds and insurance policies.

He has kept his money with two banks – a private and a public-sector bank. The "treatment" was the same at both banks.

Last month, the relationship manager of one bank dropped by Mr Fernandez's house. She convinced him to open a fat fixed deposit (FD) with the bank as a large amount in his savings bank account was earning very low interest. She also promised that Mr Fernandez would no longer be "harassed" if he decided to visit the branch.

She didn't lie. The first branch visit after a gap of three years was a pleasant surprise for Mr Fernandez. The branch manager ushered him into his glass cabin and offered him a cup of coffee. Instead of selling him mutual funds and insurance policies, he floated the idea of opening another FD for a higher return.

The branch manager also suggested that Mr Fernandez opt for a sweep-in facility. Such a facility ensures whenever funds in his savings account drop below a certain level, money will flow from the FD to his savings account without affecting the interest rate on his fixed deposit.

Banks are desperately looking for deposits as high credit deposit (CD) ratio is staring at them. Until this phenomenon had hit them, they were happy earning commission and fee income, aggressively selling mutual funds and insurance products. Now, they have reached a stage where they need to choose between fee income and interest income. (Of course, they can always earn processing fees from loans.)

They can't afford to win away depositors' money into these avenues any more as their credit growth will be affected, with deposits failing to meet the credit demand. This will also bring down their interest income.