The Pattern #41: Can banks discount their way out of a deposit crunch?

Mayank Jain   /    Head - Marketing and Content    /    2022-12-23

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    Hello everyone 

    Welcome to the 41st edition of The Pattern, a weekly newsletter where we untangle all the rumblings from the world of finance, technology, and the economy. It’s the holiday season for much of the world, but money never sleeps. Let’s get started. 

    The banking wars 

    When was the last time you thought your bank was making efforts to capture your attention? It doesn’t happen very often. Banks exist in a heavily licensed system where they don’t usually face cutthroat competition for the most basic of their functions - deposit-taking. 

    It follows logically that an increased credit demand - about 2X in the last two years - would require banks to raise more deposits to fund the expansion of their loan books. However, the demand for credit has shot up so dramatically that banks have to go beyond the organic deposit growth to create ‘exogenous’ deposit accretion, according to a report by Kotak Mahindra Bank. 

    What does this mean? Offers! 

    Banks are dangling higher interest rates, fee waivers, and many attractions to steal customers from their competition. The competition has heated up, especially as smaller banks have come into the fray along with neo-banking entities that threaten even the largest banks to become the preferred destination for young millennials and Gen-Z. 

    Banks like IDFC are waiving charges for passbooks, checkbooks, and even fund transfers through NEFT. Meanwhile, Federal Bank, HSBC, and City Union Bank offer 5-10% discounts on every purchase through their debit cards on select platforms. 

    This reminds one of the 6% savings bank account interest rate era we saw some years ago when banks found themselves in a race to offer depositors the most competitive interest rates. This soon gave way to sanity as credit demand moderated, and the 6% gradually evolved into a meager 2-4% rate. 

    While this current cycle plays out, it’s important to note that Indians do have an innate relationship with saving and banks don’t have to just compete with each other for deposits but mutual funds and SIPs, insurance plans and even digital gold savings that are fast becoming preferred modes of savings and investment among Indians. 

    Meanwhile, it’s the public sector banks that seem to be taking more risky bets with their lending by offering credit to more subprime borrowers than their private sector or NBFC counterparts. An analysis by Business Standard showed that it’s the PSBs and NBFCs that have more subprime customers while private banks are far behind.

    “While subprime borrowers accounted for a 27.1 per cent share in the overall loans disbursed by the industry until March 2022, the share for subprime loans in public sector banks' portfolio was a high 30.5 percent. In the case of NBFCs too, 28.9 percent were disbursed to the subprime segment. In contrast, in the private banks, the share of subprime borrowers was just 16.1 percent,” the report said. 

    But, all subprime borrowers need not necessarily be risky and it’s a lot to do with the underwriting practices at work as well as the mix of credit products being offered. Our CEO Rajat Deshpande penned this piece that talks about the reasons why banks are taking riskier bets and embracing even MSME credit as a way to fuel growth on the back of improved underwriting prowess. 

    While on this subject, I must mention that there’s an upcoming FinTechVerse Webinar where we’ll be going deep into the world of credit risk intelligence and understand just how cutting-edge checkout financing solutions can be built to improve approval rates while maintaining portfolio health. 

    This exclusive webinar will see our co-founder Anant Deshpande in conversation with Vikas Garg, co-founder, Paytail. It happens on January 5, 2023 and you can reserve your spot here

    Between the digits

    300 times - Banks and financial institutions are 300 times more likely to fall prey to cyber attacks as compared to other businesses. 

    75% - 75% of surveyed borrowers took some form of credit to buy consumer durables, according to a study conducted by Home Credit. Out of these more than 50% used EMI cards, 25% used credit cards and BNPL was used only in about 10% of the situations. 

    INR 30 - Paytm and HDFC Ergo have teamed up to launch a digital payment insurance that secures any UPI transaction against fraudulent activity of up to Rs 10,000 for a premium of Rs 30 per annum. 

    That’s all I have for this week. Leaving some reading recommendations below. 

    Happy Holidays! 

    Reading list 

    1. India’s Retail Credit Growth To Continue in 2023, Personal Loan Outstanding Rose To Rs 37.7 Trillion: Report

    2. BharatPe is remaking itself

    3. The checkout financing guide to thrive in an economic crisis

    4. How FinTechs can strengthen the co-lending wedlock between banks and NBFCs

    5. The FinBox Guide to Digital KYC

    Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to never miss any of our updates. 

    Cheers, 

    Mayank 

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