PSBs report sharp rise in deposits thanks to YES Bank, Franklin fiasco

Last financial year saw a series of banks failures starting with Punjab & Maharashtra Co-operative Bank and culminated in near collapse of YES Bank, India's 5th-largest private sector bank at its peak

After losing market share in deposits to private lenders, public sector banks (PSBs) have seen a surge in deposits in the past few months, as many savers become risk-averse, thanks to the YES Bank fiasco and Franklin Templeton bond fund blow-up.

PSBs reported a sharp rise in fresh deposits during the January-March 20 quarter and in April 2020, owing to the perceived safety of government-owned banks in increasingly uncertain economic environment.

A top executive of South-based PSB said his bank had seen inflow deposits of over Rs 3,000 crore in post-Covid period. In a normal course, a substantial chunk of this would have flowed to private sector banks.

Last week, State Bank of India Chairman Rajnish Kumar said the bank deposit base increased by nearly Rs 1 trillion during the fourth quarter of FY20 as many customers flocked to the safety of government-owned banks amidst turmoil in the financial system.

Last financial year saw a series of banks failures starting with Punjab & Maharashtra Co-operative Bank and culminated in near collapse of YES Bank, India’s fifth-largest private sector bank at its peak. The year also witnessed the default and bankruptcy of Dewan Housing Finance followed by Altico Capital.

On April 23 this year, Franklin Templeton announced closure of six of its debt funds due to liquidity crisis freezing up nearly Rs 30,000 crore worth of investors’ money.

Bank executives said these events made many bank customers to question the safety of their savings in co-operative and private sector banks and their investments in debt mutual funds.

A Delhi-based senior executive of a leading PSB described it as flight to safety by savers. “Large number of people are coming back to PSBs to park their funds running into thousands of crore. The trend got traction at the time of failure of private bank in the last quarter of 2019-20.”

Another interesting thing has been a sharp rise in sale of sovereign gold bonds. This has reversed a nearly two-decade process of steady decline in the PSBs share of the bank deposits in the favour of new private sector banks such as HDFC Bank, ICICI Bank, and Axis Bank.

According to the Reserve Bank of India data, PSBs accounted for 65.8 per cent of the combined deposits schedule commercial banks, including foreign banks, at the end of March 2019, down from 77.2 per cent in March 2014 and 78.2 per cent in March 2005. In the same period, private sector banks’ share increased to 29.6 per cent at the end of March 2019, from 18.7 per cent at the end of March 2014 and 17.1 per cent at the end of March 2005.

PSBs, however, regained some of their lost ground during the first nine-months of FY20 based on the data of listed banks. Listed PSBs accounted for 70.2 per cent of the combined deposits of listed banks in Q3FY20 up, from 69.5 per cent at the end of March 2019.

According to PSBs, the process accelerated during the January-March 2020 quarter and the Covid-19 lockdown. “Lockdown limited the avenues for spending and many customers put their surplus liquidity as banks deposits with PSBs. In normal course, a large chunk of their cash would have gone to private sector banks or debt mutual funds,” said an executive with a leading PSB on the condition of anonymity.

According to the RBI data, total bank deposits were up nearly 10 per cent year on year (YoY) in April, against 6.7 per cent YoY growth in non-food credit during the period. Bulk of the incremental deposits went to PSBs.