Did bankers act as Frankenstein? Rethinking savings bank deposit strategies

Victor Frankenstein spends his youth obsessed with alchemy. As he grows older, he develops an interest in chemistry and electricity. After his mother dies of scarlet fever, he leaves home to join the University of Ingolstadt. There, he discovers a new way to create life — bringing to life a grotesque humanoid creature. Horrified by his creation, he flees in terror. When he returns, the creature is gone.

 

The creature wanders, discovers fire, and learns to avoid humans, who recoil at his appearance. Observing a family from hiding, he teaches himself to speak and write. But when the family discovers him, it reacts with horror and chases him away. Later, he saves a young girl from drowning, only to be shot at by her father, who mistakes his rescue for an attack.

 

Consumed by rage for humanity, the creature returns to Geneva searching for Frankenstein but encounters his younger brother, William, and kills him…

 

The rest of Frankenstein; or, The Modern Prometheus, Mary Shelley's 1818 Gothic novel, is well known.

 

A senior banker recently said to me that the financial industry has created many such creatures. Obsessed with boosting fee-based income by aggressively selling mutual funds and insurance policies at bank branches, banks played the role of Frankenstein. By the time they realised their mistake, the damage was done.

 

Craving deposits to support loan book growth, most banks are now regretting giving targets to branches for the sale of other non-banking financial products. Despite a quarter per cent drop in policy rate in February, they cannot pare their deposit rates. How often does this happen?

 

While the cost of liabilities remains unchanged — or is even rising — interest income from loans is set to decline as a significant portion of lending is linked to the policy rate.

 

Not long ago, banks actively nudged customers with high deposit balances to invest in mutual funds. But with the sharp downturn in equities, many funds are holding cash instead of investing in stocks. 

 

What do they do with the money? They keep it with banks. Then why are banks complaining? The money is flowing back to the banks’ coffers through mutual funds in another form called certificate of deposits, or CDs. Interest rates on CDs are higher than fixed deposits. The maximum maturity of the CDs issued by banks is one year. The outstanding pile of CDs was Rs 5.19 trillion in the first week of February.

 

Banks are now turning to consulting firms for strategies to attract deposits. They are seeking guidance on boosting low-cost current and savings account (Casa) deposits, term deposits, and NRI deposits, as well as strengthening relationships with the central and state governments to secure funds.

 

Current accounts offer no interest, while savings accounts — particularly at public sector banks (PSBs)—offer low returns, ranging from 2.6 per cent to 4 per cent, with slight variations for higher balances. For deposits up to Rs 1 lakh, most PSBs offer 2.6-2.75 per cent; between Rs 1 lakh and Rs 50 lakh, interest rates vary between 2.7 per cent and 2.9 per cent, and beyond that, between 2.70 per cent and 4 per cent.

 

One may argue that PSBs collude to keep these rates low, relying on government ownership to retain customers. However, the cost of maintaining a savings account is far higher for banks, and interest is only one component of that.

 

Despite this, some private banks offer significantly higher savings rates. IDFC First Bank Ltd offers 7.5 per cent on balances between Rs 5 lakh and Rs 100 crore. RBL Bank Ltd pays 7.5 per cent on the Rs 15 lakh–Rs 3 crore slab. Yes Bank Ltd offers 7 per cent for deposits from Rs 10 lakh to Rs 100 crore. Bandhan Bank Ltd offers 7 per cent for balances above Rs 10 lakh and up to Rs 2 crore, and 8 per cent for balances exceeding Rs 50 crore.

 

Casa deposits as a percentage of a bank’s overall kitty are crucial for keeping funding costs low. It determines a bank’s ability to earn good interest income without compromising on the quality of assets. If a bank can keep its overall cost of funds at, say, 5 per cent, it can charge the customers 9 per cent and keep a handsome 4 per cent net interest margin (NIM). If its cost of funds is around 7 per cent, to earn 4 per cent NIM, it needs to charge 11 per cent. The best of borrowers won’t be willing to pay that much. This means, the quality of assets will be compromised and the bank’s higher NIM may get nullified by a higher credit cost. Of course, this is a theoretical construct.

 

Very few banks have been able to keep their Casa ratio intact over the last one year, and fewer still have seen a rise in such deposits. Between December 2023 and December 2024, among private banks, Axis Bank Ltd has seen its Casa ratio dropping from 42 per cent to 39 per cent, Bandhan Bank from 36.1 per cent to 32 per cent, HDFC Bank Ltd from 37.7 per cent to 34 per cent, IndusInd Bank Ltd from 38 per cent to 35 per cent, and Kotak Mahindra Bank Ltd from 47.7 per cent to 42.3 per cent.

 

PSBs have seen less volatility in the Casa movement. The State Bank of India’s Casa ratio has dropped from 41.18 per cent to 39.2 per cent, and that of Punjab National Bank, from 42.47 per cent to 38.12 per cent in the past one year. For most others, the drop has been around 1 percentage point. Uco Bank and Central Bank of India, in fact, have recorded a marginal rise in Casa.

 

During this period, most banks’ CD portfolios have swelled. For instance, Bank of Maharashtra’s CD portfolio has risen from Rs 27,971 crore to Rs 35,260 crore, and that of Uco Bank, from Rs 9,566 crore to Rs 12,028 crore. Among private banks, ICICI Bank Ltd’s CD portfolio has risen from Rs 1.53 trillion to Rs 1.9 trillion; that of HDFC Bank, from Rs 2.56 trillion to Rs 2.67 trillion; and Axis Bank, from Rs 1.33 trillion to Rs 1.44 trillion (all figures are rounded off).

 

The path ahead is clear. For current accounts, banks need to focus on merchant acquisition, transaction banking, cash management and trade services, among others.

 

Attracting money to savings accounts is much tougher. Some banks have already started offering collateral benefits for premium savings accounts – such as personal accident insurance cover, discount in interest rates on retail loans linked to such accounts, etc.

 

Privately, many bankers admit their immediate goal is not growth but slowing the erosion of Casa deposits. They need targeted strategies for different customer segments — students, young professionals, women, salaried employees, senior citizens, and pensioners. Also, they need to top up the competitive interest rates with other offerings such as free medical check-up, discount coupons at restaurants, attractive holiday packages… A well-crafted wealth management advisory service can complement such efforts.

 

In the realm of tax benefits, banks cannot compete with mutual funds or direct equity investments — a long-standing industry grievance to the government, which is unlikely to be addressed. Interest rates alone won’t attract savings deposits anymore. It’s time banks explore new packaging for such deposits.

 

And, of course, they must cage the grotesque humanoid creature they created — unless they still prefer fee income over interest income.