PMC Bank, Yes Bank Collapse Takes Big Toll On Deposits Of Private Lenders

Private banks garnered only 31.6% of the incremental deposits across the banking system in FY20, shows a BloombergQuint compilation of quarterly credit and deposit statistics released by the Reserve Bank of India. State-run banks garnered 54.2 % of the incremental deposits, the data showed. The remaining share of deposits is split between foreign banks, regional rural banks and small finance banks.

The direction of deposit flows in 2019-20 was markedly different from the previous year, when private banks took away 65% of incremental deposits. Public sector banks managed to corner 20.8% of fresh deposits last year, when concerns over the capitalisation of public sector banks were swirling and private lenders were aggressively capturing market share.

Of total outstanding deposits, public sector banks now hold a 62% share, while private sector banks hold 29%. This statistic adjusts more slowly to changing depositor preferences due to the large base of deposits in the banking system. As such, evaluating the share of incremental deposits gives a clearer picture of depositor sentiment.

When analysed quarterly, this was the first time in at least the past eight quarters that the share of incremental deposits parked in public banks outpaced those parked in private banks, showed the BloombergQuint analysis.

Another representation of the reduced attractiveness of private banks is the decline in growth rate of private bank deposits.

Deposit growth for private banks fell from just under 17% in the September-ended quarter to 14% in the December quarter and further to 10 percent in the final quarter of the financial quarter.

Overall system deposit growth remained stable at 9.5 percent in the March quarter, marginally lower than 10 percent in the December quarter.

The change in depositor preference links back to the financial sector accidents over the past 12-18 months.

In September 2019, the Reserve Bank of India placed Mumbai-based PMC Bank under moratorium, which restricted depositor withdrawals. The restrictions continue to be in place till June 22. This was followed by the collapse of Yes Bank Ltd., where, once again, the regulator imposed curbs on deposit withdrawals. These have now been lifted after a group of lenders led by State Bank of India infused funds.

These incidents would have a “contagion effect” on the depositor base of private sector banks, Suresh Ganapathy, analyst at Macquarie Capital, had warned in a report in March.

“The collapse of two banks - A co-operative bank PMC and a scheduled commercial bank YES Bank within a span of 6 months along with collapse of some NBFCs like IL&FS, DHFL has shaken, in general, depositor confidence in the financial system,” Ganapathy wrote, adding that retail depositors often tend to club banks as ‘public’ or ‘private’ rather than look into the individual health of each lender. “In general, this situation can snowball in case RBI and the Government don’t act very quickly to restore depositor confidence,” Ganapathy said.

These episodes not only shook retail depositors but also prompted a handful of state governments, most notably Maharashtra, to move deposits of government departments to state-run banks. This was countered by rare assurances by the Reserve Bank of India that banks and bank deposits were safe.

In February, the government decided to raise the amount of insured deposits to Rs 5 lakh from Rs 1 lakh earlier, in an attempt to give depositors more comfort. This insurance, however, only kicks in after a long process of liquidation of a bank.

Even within private banks, there is a meaningful diversion between small and large ones, said Manish Ostwal, senior equity analyst at Nirmal Bang Securities. Even as retail depositors continue to associate public banks with higher safety, over a longer term, public banks have been losing share to private banks on all accounts and that trend is expected to sustain, he added.

More broadly, lower policy rates may push down deposit rates across the banking system, reducing the attractiveness of bank deposits. Deposit growth is unlikely to see a pickup across the banking sector even in the next few quarters. Interest rates are so low, said Ostwal. With markets performing better, risk appetite has picked up and mutual fund schemes are seeing a healthy inflow, he said.