Uday Kotak, Asia’s richest banker and the founder of Kotak Mahindra Bank, has raised concerns about a major issue affecting banks today – a decline in deposit inflows.
Kotak pointed out that banks are struggling to attract deposits, especially low-cost retail deposits. As a result, they are increasingly relying on bulk deposits, which come at a higher interest rate, making banking operations more expensive.
Banks are facing this liquidity crisis as the investment pattern of Indians is changing. Now, people are investing less in Bank FD and more in stock market and mutual funds.
In a post on the social media platform X (formerly Twitter), Kotak warned:
“If the shortage of deposits continues, it will become a threat to the banking business model.”
What Does This Mean?
For banks to function efficiently, they need a steady flow of deposits from customers. However, if deposits are insufficient, banks must borrow money at higher interest rates. Kotak highlighted that:
- Large banks are accepting bulk deposits at 8% interest.
- After adding additional costs, the marginal cost of deposits exceeds 9%.
This means banks must pay more to borrow money, increasing their overall expenses.
Why Is This a Problem?
Banks do not just pay interest on deposits—they also have to meet regulatory requirements like:
- Cash Reserve Ratio (CRR): A portion of deposits must be kept with the RBI without earning interest.
- Statutory Liquidity Ratio (SLR): Banks must invest a part of their deposits in government bonds.
- Deposit Insurance: A system that protects depositors’ money if a bank fails.
- Priority Sector Lending: A rule requiring banks to lend a specific percentage of their funds to sectors like agriculture and small businesses.
Banks Are Losing Money on Loans
Despite these high costs, banks are offering home loans at an 8.5% floating interest rate, while their borrowing cost is 9%. This results in a loss of 0.5% per loan, meaning banks are paying more in interest than they are earning from lending.
Future Challenges
Kotak also mentioned that retail deposits are growing slowly across the banking sector. Additionally, if the RBI reduces the repo rate further, banks will find it even harder to balance their costs and lending rates.
The repo rate is the interest rate at which RBI lends money to banks. A lower repo rate typically reduces borrowing costs for banks, but it also affects the interest rates they offer on deposits, making it harder to attract funds.
The RBI monetary policy committee meeting is scheduled to be held in coming months and if Repo rate is decreased further, then it might create more problems for Banks.
The banking sector is facing a serious challenge due to declining deposit inflows and increasing borrowing costs. If this trend continues, banks may struggle to maintain profitability while offering loans at competitive rates.
