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Madan SabnavisChief Economist, CARE RatingsWith the wide-ranging changes taking place in the banking sector, the status of a deposit holder has also changed and one should be prepared for more.
A bank deposit was considered to be the safest avenue for parking funds as there was an implicit guarantee on them.
The returns were lower than those on company deposits or other alternative sources of savings, but the underlying comfort made them attractive.
The status of a deposit holder has changed over time.
First, the saver has been made to pay for various services, including cheque books and enquiries, beyond certain limits which was a shocker to begin with.
Deposits are the core of banking and one would expect the holders to get certain benefits.
But now, banks penalise a deposit holder for walking into the branch.
Second, interest rates on deposits are never the concern of policy makers and the credit policy is focused only on the borrower, and hence at the apex level, these returns do not matter.
We are concerned about investments, but take savings for granted.
Third, while policy is set based on inflation targeting, the point missed is that real interest rates is a theoretical construct and practically speaking the return on a deposit gets hit by cumulative inflation and not just current inflation on declining deposit rates.
Hence, when the statement is made that real deposit rates remain unchanged when inflation comes down, the absolute spending power is denuded.
Therefore, the deposit holder gets short-charged on both the nominal return, which goes down and cumulative inflation.
Unlike a manufacturing concern which runs on equity of owners, banks run their business on deposits of households.
Every time they mess up with loans, they fail in the job of intermediation and hence misallocate resources.
But deposit holders have no say in replacing management of banks.
With these developments already in place, the new ground rules being spoken of are a greater threat to deposit holders.
The first is the realisation that deposit guarantee is actually only up to Rs 1 lakh per person, including all accounts held in different branches.
It is, hence, an illusion that a retired person keeping Rs 50 lakh in a bank deposit is safe.
While it is assumed that banks will not be allowed to fail, there is legally nothing against the liability being restricted to just Rs 1 lakh.
It is not surprising that the DICGC is very profitable as it charges 10 paise per Rs 100 of insured deposit and hardly gets to address claims.
Second, with the RBI already instructing banks to benchmark their lending rates to a set of anchors like repo rate or T-bill rate for retail and SME loans, the logical corollary is that it would, at some time, do the same for deposit rates after covering corporate loans.
Otherwise, the banks will be at a disadvantage.
This will mean that with this relentless pursuit towards lowering the repo rate, deposit rates could crash downwards.
Therefore, returns can vary every quarter and this is not very different from the uncertainty in the stock market.
Third, the Financial Responsibility and Deposits Insurance Bill, which has been deferred for the time being is bound to resurface at some point of time which is scary.
The bill talks of a bail-in clause where deposit holders should shoulder some losses of the bank.
Hence, if a bank fails, deposit holders, too, have to bear a part of the cost in the form of haircuts on their deposits.
If this is going to be the emerging scenario, bank deposits would no longer be as attractive as say a highly-rated bond or fixed deposit of a corporate.
Banks may just be useful to park savings for daily use, while term deposits would shift to other avenues.
In fact, long-term G-Secs could be attractive if the idea is to hold till maturity.
Further, there is talk of privatisation of PSBs.
If this happens, banks with NPAs of 25% will not be able to survive and the meltdown to deposit holders will be inevitable.
In the new scenario, banks have to be forced to make all disclosures just like an IPO offer document.
A credit rating would also be desirable to allow for informed decisions to be taken by deposit holders.
Quite clearly, the better run banks will get the funds, while others will find it a challenge.
Such a scenario is not really unthinkable based on the direction in which we are moving.
(Views are personal)
Stock Market
Better-run banks will get bigger share of deposits
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