The Governor of the RBI made a very pertinent point when he urged banks to be more innovative in attracting deposits, particularly in their household financial service offerings. This could be achieved by leveraging their vast branch network. In the 50th monetary policy review last fortnight, Shaktikanta Das cautioned that banks’ reliance on short-term non-retail deposits and other instruments of liability could expose the banking sector to structural liquidity issues – a stern warning indeed.
The fact is that the younger generation, who are earning far more than their fathers and forefathers, are smart, technologically savvy, and more inclined to take risks for better yields. While the protection of capital was the primary criterion for the older generation, who preferred to place their surplus funds in fixed deposits, the younger generation is not keen on locking up funds with banks. They understand that a mere 2-3 per cent post-inflation return is a very meagre sum to justify locking in funds for a longer duration. The post-tax returns on investments in other alternative avenues, as the Governor rightly pointed out, are far more attractive even with limited risks. The only deposits that the under-50 generation might maintain are for meeting unforeseeable exigencies. There has been no survey on the age-wise breakdown of deposit holders across banks. If there were one, deposits from senior citizens would probably be multiple times higher than those from the younger generation. The second largest deposits would likely be from charitable organisations, trusts, and some companies.
Beyond the niggardly post-inflation, post-tax returns earned by deposit holders, it is also the nonchalant attitude of staff members that is concerning. The PSU banks, which remain the largest lenders today, are not actively courting depositors or attracting potential young customers. There is no incentive for branch managers or staff members to meet deposit targets. With branch walk-ins becoming uncommon, one would have expected branch managers and staff to actively build relationships with this younger demographic. Unlike in earlier years, demand now has to be generated through relationships. Except for courting some ultra-high-net-worth depositors, branch managers or their staff rarely leave the precincts of their respective branches to meet clients. Cooperative managers regularly spend part of the day meeting account holders. The less said about the service and attitude of bankers, the better. There is hardly any emotional connection with clients.
While banks have their limitations in raising interest rates, given their burgeoning costs and the emphasis on protecting Net Interest Margins the need of the hour is to offer comprehensive packages to account holders. Currently, only deposits up to R5 lakh are guaranteed by the Deposit Insurance and Credit Guarantee Corporation. Let the RBI allow banks to compete by offering additional insurance to depositors, ensuring that the entire deposit amount is guaranteed at a nominal insurance payment, which could be borne by the banks and the deposit holder. Additionally, in the case of housing loans, the entire liability could be borne by the bank if the principal depositor passes away before the full loan is repaid. LIC Housing already insists on taking out insurance to this effect. Banks should be given the freedom to package loans with such in-built insurance products.
Currently, banks insist on tying up every available asset in the case of a loan, including, in many cases, insisting on personal guarantees, third-party guarantees, and other assets before disbursing loans. This is done even when banks are eager to offer unsecured credit by providing credit cards without much due diligence. The resultant NPAs, which will rise in the years to come, ultimately get factored into the lenders’ costs, indirectly suppressing deposit rates. Banks could easily link new credit cards to a certain amount of mandatory deposits, as is already done with locker rentals. At least 15-20 per cent of the credit limit on the card could be secured.
Bankers need to upgrade their role from being just custodians of money and lenders to becoming better advisors and offering comprehensive advice to their clients. Banks ought to organise programmes and engage good financial advisors in the interim. Managing portfolios should be the aim at a later stage. Risk profiling of account holders can only be done when there is a strong relationship between depositors and staff – not merely to shore up deposits at the year-end but to genuinely help clients. The bankers of the future must become go-getters like PMS managers, looking ahead and genuinely helping clients.
Besides innovation, what bankers require is better client management, building emotional connections, developing new skill sets, and, above all, realising that times are changing and the days of free lunches are over.