Banking system in India. Why banks in India are facing difficulty in getting deposits?

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Further insight into banking systems around the world

Indian Banking System and Indian Currency
Indian Banking System and Indian Currency
Long-term and short-term fixed deposits.
Long-term and short-term fixed deposits.
Mutual Funds
Mutual Funds
Reserve Bank of India, the wholesole regular of Indian Banking System.
Reserve Bank of India, the wholesole regular of Indian Banking System.
National Savings Certificate, another good alternative to invest.
National Savings Certificate, another good alternative to invest.

Current Indian Banking System Scenario

Two points for what was happening in banking and investment sector in the last 5 years:

  1. Increased consumerism: If we look at the consumption pattern in last 5 years, people were moving from being savers to consumers, i.e., more emphasis on benefits gained today rather than gains received through savings in future, this changing attitude is one of the reasons for higher growth in lending compared to deposits.
  2. Alternatives and risks: People were looking for more alternatives like mutual funds, different insurance schemes, stock market, etc. People were moving to these products with higher return expectations. These instruments also have higher risk and increased income level people who deposit high amounts of money into banks were ready to take these high-risk alternatives.

But now the situation will be slightly better for banking system in India because investors are losing a lot of wealth in stock markets and mutual funds. People will realize the importance of safer investment vehicle and will start diversifying their portfolio with increased exposure to safer instruments like bank deposits.

The banks in India generate their funds from two types of sources:

Long-Term Sources:

  1. Tier one and Tier two Capital in the form of equity/subordinate debts/debentures/preference shares.
  2. Internal accrual generated out of profits.
  3. Long-term fixed deposits generated from public and corporate clients, financial institutions, and mutual funds, etc.
  4. Long-term borrowings from financial institutions like NABARD/SIDBI.

Short-Term Sources:

  1. Call money market, i.e., funds generated among interbanking transactions where there is online trading of money between bankers.
  2. Fixed deposits generated from public and corporate clients, FIs, and MFs, etc.
  3. Market-linked borrowings from RBI.
  4. Sale of liquid certificate deposits in the open market.
  5. Borrowing from RBI under Repo (Repurchase option).
  6. Short and medium-term fixed deposits generated from public and corporate clients, mutual funds, and financial institutions, etc.
  7. Floating in current and saving accounts.
  8. Short-term borrowings from FIs by way of rated papers placed, etc.

RBI plays a role of regulator apart from money provider in specific cases.

Right now this seems to be a short-term crisis unless the production figures of the next month also shows negative trend like it has shown in the month of August @ 1.30% (very low compared to the previous figures of between a band of 5 to 9%).

If IIP figure goes down continuously for the next 2 to 3 months, we have to assume, there is a recession in the country. As the service industry may not grow at the volumes shown previously. The industrial growth is a big hope for the future sustenance of the growth in India.

Now let us analyze the situation of all these sources in the present scenario for the banks:

A) This is not the right time to generate the funds from long-term sources due to the bad market scenario, so let us focus on the short-term sources.

B) Call money market is very tight. RBI borrowings and placing short term papers is not the best way to generate funds as the mutual funds and FIs are facing acute pressure due to withdrawals from the foreign investors including NRIs.

Hence pressure is on retail deposits and now every bank wants to concentrate on these as a source. The rates are increasing. This is a very good time to keep money in a 2- to 3‑year lock deposit with nationalized banks. You may be offered 10.50 to 10.75%. It would be 0.25-0.50% higher in case of the private/foreign and co-operative banks.

I would like to give all credit to the regulatory system in India, which has withstood to the acute pressure on banking sector. You would remember the co-operative bank fiasco 3 years back and now foreign and private banks are under scanner. Thanks to the mature regulatory system, we are relatively safe as far as banking in India is concerned.

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Comments 30 comments

Anamika S profile image

Anamika S 7 years ago from Mumbai - Maharashtra, India

As a Banker myself I do not like the Policy of the Banks to concentrate more on other peoples products like insurance and Mutual Funds than concentrating on building loyal current accounts, savings account and fixed deposit customers. If something goes wrong with the Third Party products you would lose your Customer too.


soni2006 profile image

soni2006 7 years ago from New Delhi, India Author

I agree with you a loyal customer can give them long-term benefits as banking is a field in which trust comes in the first place. TPAs or third party products carry a lot of risk but banks sell these products easily because of their high expectations. Everyone wants to gain or earn money in a short-term period or as quickly as possible as the price for everything is increasing, lifestyle is getting more expensive. Just go ahead and talk with the old people out there who are government servants and others. Those people are always interested in nationalized banks and savings and fixed deposit accounts whereas young professionals are moving towards mutual funds and stock and shares.


pankaj3625 profile image

pankaj3625 7 years ago from Delhi

Yes I agree with both of you (Anamika and soni) that banks should think for fixed deposit schemes and savings accounts before moving towards mutual funds and other schemes. Great hub.


soni2006 profile image

soni2006 7 years ago from New Delhi, India Author

Thanks for agreeing with my ideology on this subject.


Mr JAGDIP.H.VAISHNAV 7 years ago

SIR.

BANKS ARE FUNCTIONING ON PUBLIC / CUSTOMER MONEY/DEPOSITS,

DEPOSITORS HAVE KEPT TRUST IN BANKS AND WHEN BANKS ARE EARNING PROFIT, PART AMOUNT SHOULD BE KEPT FOR DEPOSITORS ALSO SO TO EXTEND BETTER CUSTOMER SERVICE

BANKS SHOULS CONCENTRATE ON ASSET QUALITY, REDUCTION OF NPAs RATHER THEN THIRD PARTY PRODUCTS


soni2006 profile image

soni2006 7 years ago from New Delhi, India Author

Nice advice Mr. Vaishnav.


netsurfer profile image

netsurfer 7 years ago from Bulgaria

Nice topic, enjoyed reading it.


soni2006 profile image

soni2006 7 years ago from New Delhi, India Author

Thanks netsurfer. I also enjoy your hubs.


soni2006 profile image

soni2006 7 years ago from New Delhi, India Author

Thanks for being regular user of my hubs vrajput. Your hubs are also outstanding.


prm.peddada profile image

prm.peddada 6 years ago

AS RETIRED BANK OFFICER I AM COMPORMISE WITH THE VIEWS OF YOUNGER GENERATION FOR VENTURING INTO OTHER SECTOR OF BANKS LIKE MUTUAL FUNDS AND SHARE MARKET , HOWEVER I SUGGEST THAT BE CAUTIOUS IN INVESTMENTS AS THE BANK DEPOSITS MAKE GIVE LESS IT WILL BE SECURE AND SAFE IN LONG RUN AND FUNDS WILL BE AT YOUR RISK,SHARE MARKET POSITION NOW BETTER WHEN COMPARED TO PREVIOUS MONTHS AND IT WILL REQUIRE CAUTIOUS APPROACH SO DO ACCORDING THE NEEDS COME TO RISK.


soni2006 profile image

soni2006 6 years ago from New Delhi, India Author

We are really benefited by the nice advice from such an experienced bank officer like you Sir. We will follow you advice regarding investments and move along cautiously.


Bijan 6 years ago

Previously Credit Management was an aftermath of deposit management because interest rates on credits as well as deposits of individual banks were regulated.Now it is reverse.Each Bank is free to mobilise deposit from the market and each Bank has to decide at what rate to lift the deposit so as to maintain a healthy margin in credit. Deposits are plentily available but Banks are reluctant to lift them for 2 reasons-

1) There is enough liquidity in the Banks and unless same

are deployed profitably, it is silly to add more deposit.

2) Banks are emphasizing on low cost Savings and Current

deposits and in this segment there is pressure of mobili

sation.


soni2006 profile image

soni2006 6 years ago from New Delhi, India Author

Thank you very much Bijan for your insightful details you have provided via this comment. I did not know that there was enough liquidity with the banks before you told me but when I related it with decrease in home loan and other interest rates today, then I came to the point that you are actually right. The banks or RBI has decreased the prime lending rate and thereby influencing other interest rates like mortgage loans and others because the banks have enough liquidity available and they are not looking much towards deposits because they have plenty of deposits and now they are looking towards lending money in different forms via home loans, car loans, and personal loans.

Thanks to the decreased home loan interest rates as because of that, the real estate market is rising up again and there are a lot of people who are buying properties in India including Delhi and NCR as evidenced by the real estate and property market news.


mortgage qualifier calculator  6 years ago

Lots of sources here to help some one that is in need of advice, the kind of information a lot of people are looking for thank you. Some times it hard to ask for help, but with this kind of information it all becomes easier.


multifunctions profile image

multifunctions 6 years ago from India

i feel that banks should restructure the customer care especially government sector banks. and must go for diversified and custom made products for increasing deposits.


soni2006 profile image

soni2006 6 years ago from New Delhi, India Author

I think you are right that the most important is to restructure customer care of government sector banks and it is really slow and needs to be upgraded.


bihar profile image

bihar 6 years ago from Patna

The banking system in India sucks big time.


soni2006 profile image

soni2006 6 years ago from New Delhi, India Author

I agree with your bihar.


Online CD Rates 6 years ago

Government banks in India are facing a stiff competition in terms of customer service although they are pulling up but it would take a long time to change the working style of these financial institutions to come at par with their contemporaries in the private sector.


soni2006 profile image

soni2006 6 years ago from New Delhi, India Author

Yeah, I agree it will take time but there are a lot of additional factors to be taken into consideration by banks to improve customer service and meet their goals.


gsharadasheker profile image

gsharadasheker 5 years ago from Zaheerabad

Good information o like it


bineet singh 5 years ago

monitry policy of RBI, what is effect for inflmation


smitha 5 years ago

i agree that watever you have told.and each can understand wat is the process of bank.where money goes.and how it is benifited for a normal cutomer and loyal customer.its really a good thing to under stand and invest money.


nosheen 5 years ago

nice discussion,i really like that.


Sachin Maheshwari 4 years ago

Dear all,

what you think from the employee perspective, as if professionalism is completely dissolved in banking if compare to IT industry or any other industry and if employee get frustated how the bank survives long term. As insurance MF is a concept selling it takes time people to understand


kiran 4 years ago

But banking is getting down in continuous manner .

For example DENA ,UCO, AXIS, SBI ,ICICI are almost at half of rate now . Why so ?


ashish 4 years ago

how subject history helps in banking sector pls suggest


nsachari 4 years ago

banking system in India has a prominent role. but we gonna fast transformation on it


Alliance Direct 3 years ago

The culture in India is definitely changing. Consumerism isn't a bad thing and will only hopefully help emerging markets.


soni2006 profile image

soni2006 3 years ago from New Delhi, India Author

Thanks for your visit friends.

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